Why Oil Refinery Closings Can Make ETFs Attractive

April 17th at 3:00pm by Tom Lydon

U.S. oil refineries are suffering from the simple outcome of supply versus demand, and numbers indicate that certain refineries will be forced to shut down soon, possibly leading to the streamlining of related exchange traded funds (ETFs).

Many analysts are making their picks as to which refineries will be the first to call it quits and how many may close, as oil and gasoline demand peaked around 2007. Many expansion projects at U.S. refineries are still under way. leaving the nation with more refining capacity than it needs, reports Susan Daker for The Wall Street Journal.

There are many factors that determine which refinery will close, such as whether a plant can run on high-sulfur, cheaper crude and can meet new environmental regulations without a costly upgrade. Size and location are a factor, as well. The smaller refineries are less complex, so many are pondering if they will close first. However, size has nothing to do with a final decision.

The danger lies in the possibility of prices rising within the next year or two; refineries could be caught short-handed, after the closures. Some refineries rumored to be on the “watchlist” include Sunoco’s (SUN) Tulsa, Oklahoma plant and Flying J Inc.’s refinery in Bakersfield, Calif., was idled last year just after filing for bankruptcy.

But this doesn’t mean that the sub-sector should be disregarded, however. While they can be volatile and risky, the refiners tend to have very strong bottom lines, the Bullish Bankers on Seeking Alpha report.

Some refiners might be more stable than others, though, which means that if investors want access to this sub-sector, and ETF could help spread around the risk. Just watch the trend lines closely, and have an exit and entry strategy at the ready.

Oil is around $50 per barrel today.

  • iShares Dow Jones U.S. Oil And Gas Exploration Index (IEO): up 3.4% year-to-date

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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