Trading Nation

These energy stocks are rooting against crude oil

Time to get out of the refiners?

Crude oil has risen by 25 percent over the last three weeks, which has helped energy to be the best-performing sector this month, outperforming the by more than 2 percent.

But not every energy name is along for the ride.

Refining companies like Valero and Tesoro have gotten hit hard over the past week, falling 8 percent and 6 percent, respectively. This is because refiners buy crude oil to make into gasoline, but wholesale gasoline prices have not risen nearly as quickly as oil has over the past week. So these companies are now seeing their costs increase, but aren't bringing in much more revenue.

"I think this has been a hiding place for investors. When oil's coming in, the refiners benefit. And people put a lot of money in here, and they watched. Now that you're seeing this trade stabilize a bit in terms of crude, you're seeing money flow out of these names into other areas of the space," said David Seaburg, head of equity sales trading at Cowen & Co.

And Seaburg says it could get much worse for these names.

Looking at Valero specifically, Seaburg predicts that "as it overshot to the upside when oil was getting crushed, it's going to overshoot to the downside here."

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Valero Energy refinery
Eddie Seal | Bloomberg | Getty Images

Of course, it might be not worth shedding a tear for these hot stocks. In fact, Stephen Schork, editor of The Schork Report, says the recent opportunity for refiners has actually been a driver behind the crude oil bounce.

"We're seeing record demand from refiners, because they're making 20, 30, 40 percent margins. So refiners are buying as much oil as they can," he said. "You have to imagine that the trade is getting a little unwound at this point."

In other words, the divergence between crude oil and oil products simply became too wide to be sustainable. And while that may be bullish for crude oil, it's not great news for those hoping to jump onto the refiner trade now.

"Do I think we're at a point where you should be putting money into the refinery space? Absolutely not," Seaburg said.

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