Traditional energy stocks and the related exchange traded funds are being blasted this year, but some market observers see pockets of opportunity in the space. The VanEck Vectors Oil Refiners ETF (NYSEArca: CRAK) may one example.
CRAK tracks the MVIS Global Oil Refiners Index. That index “is a rules-based, modified capitalization-weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining which may include: gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to VanEck.
CRAK could offer more upside as Americans hit the roads and the skies after months of being subjected to stay at home orders. That pent up travel demand could boost activity for refiners.
“The refining market remains in recovery following what is likely to be the trough in refined product demand in the second quarter,” notes Morningstar analyst Allen Good. “Demand has begun to recover, although the future pace is in question as infections continue to spread, potentially slowing the economic recovery. As such, refiners will probably have to maintain utilization discipline through at least the remainder of the year, with most management teams not expecting a return to average inventory levels until the middle of next year.”
Good News for CRAK
CRAK and refiner equities don’t necessarily need oil prices to rally; they need demand and price stability. The U.S. refining sub-sector has been one of the most profitable sectors in the U.S. economy over the past five years. Importantly, refiners took steps to mitigate the impact of the COVID-19 crisis.
Still, investors should lean toward the strongest of the bunch in the refining industry.
“Given that all refiners appear relatively cheap, we’d lean toward quality, which means we prefer Valero Energy (VLO),” notes Good. “A rising tide of improved product demand, lower inventory levels, and higher margins will lift all boats, but as a pure-play refiner with the highest-quality assets, Valero stands to benefit while offering protection if the difficult environment persists longer than expected.”
Valero is the sixth-largest holding in CRAK at 5.53% of the fund’s weight, according to VanEck data. Adding to the CRAK case are incremental signs of recovery.
“A recovery in refined product demand is slowly underway. Both gasoline and distillate have shown more progress than jet fuel, although their initial declines were less severe,” said Good.
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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.
