Analysts forecast nationwide refining margins to average $9.00/bbl in 2007, approximately 68% above estimates of mid-cycle. Refining margins have been exceptionally high in the past two years, concurrent with the rise in oil prices, owing primarily to a surge in worldwide refined product demand, which not only stretched oil supply, but strained the worldwide refining system.
In addition, tight refined product supplies were exacerbated by an array of new fuel regulations in the U.S., and damage from two powerful hurricanes on the U.S. Gulf Coast in third-quarter 2005, resulting in below-average refinery utilization in the past 12 months.
The integrated oils are attractively valued for a medium-term investment. However, in the near term, in a moderating oil price environment, analysts do not envision stock prices for any of the major oils rising. In the past, the correlation between oil price movements and the integrated oil stocks has been high. But, using a selective approach, analysts believe investors can make money in the integrated oils over the intermediate term.
The integrated oils are attractive on a valuation analysis, and our outlook for operating performance as measured by reserve replacement, finding and development costs, production growth, and production costs. On this basis, Exxon Mobil (NYSE:XOM), BP (NYSE:BP), and TOTAL (FP) could outperform the peer group in the coming year. Likewise, for the independent refiners, expect stock price movements to follow changes in refining margins, though stock price movements could be sharper than for the integrated oils, due to higher sensitivity to changes in commodity prices.
Refining margins will continue to be erratic and volatile this fall, makingway for short-term trading opportunities. Near term, Sunoco (NYSE:SUN) and Valero (NYSE:VLO) have the most potential for upside, based on valuation and outlook for potential distillate product price volatility this fall. However, given that the refining cycle may be near its peak, expect stock prices for the independent refiners to trend downward over the next several months.
Gasoline prices plunged more than 21 cents a gallon over the past two weeks to a national average of $2.66 amid an abundant supply of fuel at service stations. Lower demand for gas with the end of the summer driving season and a drop in crude oil prices combined to send prices downward across the United States. The average price of a gallon of gas has fallen nearly 37 cents a gallon in the last four weeks.
Oil fell for a sixth day, its longest losing streak in almost three years, and gold tumbled below $600 an ounce after negotiators reported progress to resolve a dispute over Iran's nuclear research. Meeting with Iran's top negotiator have been 'productive,' which eases concerns that the country may halt oil exports. Also aiding and abetting the fall in oil is OPEC, who will probably agree to keep pumping at full capacity, ministers from member countries said.
There's weakness across the board, and there's some talk that this could be the beginning of the end for the five-year rally in commodity prices. Gold fell $18, to $592 an ounce, the lowest since June 29, and the fourth straight day of declines. Movements in oil and gold prices are 81 percent correlated. Some investors buy gold as a hedge against rising inflation and as a haven asset that retains its value better than other securities, such as stocks, during times of geopolitical tension.