The refining stocks are the hottest stocks in the market this year. And the finest among them is San Antonio's Tesoro Corp (TSO). Shares this year have surged 76%. If you want to know why refining is such a good business, consider this - crude oil plunged 2% Thursday yet gasoline prices still rose. Shutdowns and other supply disruptions continue to make the service of turning crude into gasoline more valuable.
Tesoro Chief Executive Bruce Smith joins the guys for this conversation.
Why do you believe gas prices have continued to rise when crude drops?
“The good news is the world economies are strong. (The bad news is) there’s so much demand and there's a limited amount of refiner capacity,” replies Smith.
He adds, ”Today (there are) complications in making fuel, we see refiners taken down… because today you take down one unit and….you have to take down other units… So it’s really just fundamental supply and demand.”
Usually refiners are operating at a higher rate this time of year. Why isn't utilization higher?
Smith says “In a globalized world, other things are happening. This year refining capacity supply is up 3.6% - demand is up 2.4%. The problem is, there are refiners around the world that have been down for other reasons and imports are down.
In California, alone, to meet demand we’re importing twice as much as we did a year ago and we have to go to 22 countries to bring in product. That’s how this globalized market is - and it’s not going to change quickly”
What’s going on with heating oil and jet fuel?
“We produce other products, particularly jet fuel. And in a globalized world the same thing applies - there’s been an enormous demand for jet (fuel). We produce 90,000 barrels a day of “jet” and the jet crack is over $20… that’s $7 dollars higher than a trailing price deck would get you…. There’s just no way to be able to meet the products being required around the world. People want to look at just the United States but you can’t do that anymore.”
You’re referring to China and India?
“China, India and there are other places. Economies in Western Europe are good… the beast that’s consuming so much now is China,“ answers Smith.
He adds “Overall when you think about future supply, refiners are not just going to pop up overnight. It takes billions of dollars to build one -- and enormous resources and a lot of time.”
Can you predict gas prices?
“The refining business is at very low inventory levels. It’s out of a high maintenance period and ready to meet a constant demand. If we can do that without major disruptions (hurricanes etc.)…. we’re going to see more constant prices and maybe even prices going down a little bit. But it will still be strong relative to history.”
Dylan Ratigan says the bottom line is – as long as demand stays strong from around the world, investors are likely to see refiners continue to perform.
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Trader disclosure: On May 24, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:
Najarian Owns (JPM), (SPF), (MU, (EMC), (BIIB), (FITB); Bolling Owns (T), (DIS), (ICE), (NMX), Gold, Silver, Coffee, Sugar