Refining Stocks: One Of The Only Value Plays Left

Get ready for more pain at the pump.

Last week’s gasoline inventory report showed a surprising drop of 5.2 million barrels versus expectations for an increase of 1.6 million barrels. The price of unleaded gas jumped 10% higher on the news.

Yesterday, the gasoline report came in line with expectations for a 2.3 million barrel drawdown. The price of gas rose again.

By the look of the following chart, this price hike is just the beginning…

The price of unleaded gasoline is approaching the upper end of a five-month trading range. If gas can break above resistance at about $2.10, the pattern suggests a move as high as $2.55.

That’ll be a drain on consumers, and it’ll put a little extra strain on the prospects of an economic recovery. But it’ll be a huge benefit to gasoline refining companies. And they can sure use the boost…

Refining stocks peaked in late 2007, making a painful descent into the market’s basement. Many of the stocks in the sector lost nearly 80% of their value during the bear market of 2008 through early 2009.

While the “Miracle Rally of 2009″ has provided a modest boost to the shares, the refining sector remains largely unloved and is just slightly above its March lows. In fact, it’s one of the few real “value” plays left in the market.

The risk to buying the refining stocks right now is relatively low. If the general stock market finally peaks and begins the downturn I’ve been expecting for months, refining stocks should be somewhat immune. After all, they haven’t experienced the absurd price gains we’ve seen in other sectors of the market. So they don’t have a lot of potential downside.

On the other hand, if the Miracle Rally is going to continue through the end of the year, then underperforming sectors like the refiners are going to play catch-up as institutional money managers seek out low-risk areas for new funds.

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