Why Refiners Might Be Poised to Keep Plunging

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Last Friday, Oppenheimer downgraded refining stocks Phillips 66 (NYSE: PSX  ) , Marathon Petroleum (NYSE: MPC  ) , Valero (NYSE: VLO  ) , HollyFrontier, and Tesoro from outperform to perform, reinforcing investor nervousness over the sector.

So what: Refiners have slumped in recent months on weakening crack spreads, and Oppenheimer doesn't expect the pressure to let up in Q3. While crude differentials started to widen last month, analysts Fadel Gheit and Robert Du Boff said that it won't positively impact the current quarter due to the 1-2 month lag time of crude purchases.

Now what: Oppenheimer expects Q3 earnings for refiners to reflect weaker crack spreads, a narrowing Brent-WTI spread, and lower margin capture. "Margin capture should be down for a variety of reasons, including the cost of RINs (~$0.85/g, up slightly from 2Q13), planned and unplanned downtime, pipeline constraints, and the shift in the oil market structure from contango to backwardation, which implies higher crude acquisition costs relative to benchmark cracks," Oppenheimer noted. Of course, when you consider that crude differentials are steadily starting to widen, long-term investors might want to use this quarter's weakness to pick through the space. 

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