Oil stocks are up, supplies are up, prices on natural gas are way down. Yet gasoline prices keep marching upward.
What's going on? The story is in the refineries.
Refining is a bad business to be in, so refineries are being sold, closed, and shut down. Sunoco (NYSE:SUN), for instance, was recently dropped to the equivalent of a "sell" rating because it's stuck with unprofitable refineries in the northeast. Shares in other refinery companies, like Tesoro (NYSE:TSO) and Valero (NYSE:VLO), are not doing much better - both are down over 40% over five years.
Part of the problem is that gas isn't just gas anymore. The gas you use in winter is different from what you use in summer. California gas is different from Texas gas. Refiners also have to switch blends based on weather, using more butane (which gasifies near the freezing point of water) in the winter and more ethanol (which costs $2.50/gallon) in the summer.
Because demand for what refineries make is at a 15-year low thanks to efficiency, conservation and slack demand, refining remains a rotten business to be in, and the margin between the production available and demand can be wafer-thin. Gas prices on the West Coast just skyrocketed because of problems with hydrofrackers at just two plants. Prices in the northwest are rising due to a single refinery fire.
And now, gas isn't just gas. The chemicals added for California, and other urban places to help gasoline burn cleaner cost money.
Refineries have to recoup these costs across less demand than before. They have to recoup the cost of switching to more alcoholic blends. They have to recoup the cost of chemicals used to reduce pollution. They have to take more money out of each gallon they produce, even while their margins remain wafer-thin.
There is no quick fix. Drill, baby drill has delivered us a glut of natural gas, with prices half what they were a few years ago. Even Warren Buffett got caught out. But oil, and gas liquids, are only a part of the gas price equation.
Gasoline doesn't come from oil wells - it comes from refineries. It's a complicated business, an expensive business, and a business that's falling around its boosters' ears. Refiners can export - and in fact the U.S. is a net exporter of refined products - but the problem won't be solved that way.
It's hard to see any new refining capacity added with current refineries remaining in financial distress. It's hard to see that distress ending with increased fuel efficiency, conservation and slack demand.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.