Crude Oil Cracks $117/Barrel

Today, Nigerian terrorists sabotaged a pipeline in Lagos slowing crude exports from the West African nation. After the attack, traders at the New York Mercantile Exchange (NYMEX) saw clear skies for the price of crude, sending it up to close at $117.48/barrel.

To give you some perspective, Crude Oil traded at $11/barrel just 10 years ago. That’s when the wildcatters in Midland/Odessa were capping their wells. In 1998, it cost some of them more money to pump Texas Tea out of the ground than they could get on the open market. Now these same oilmen are driving around Maseratis — the cars that Bear Stearns hedge fund managers used to drive.

West Texas Oil barrons may not care about carbon emissions from their Italian sportscars, but I’m not keen on my $80 fill-up at the pump. Cruising around the burbs, I noticed $3.32 unleaded. Since the national average is $3.50 a gallon, I guess I should be happy. Truth be told, I may soon be longing for the days of $3.50 gasoline. Let me explain.

Refiners’ margins have been declining over the past year. Known as the “crack spread” to industry insiders, these margins have fallen from $30/barrel, to $13/barrel, in less than a year. As you might gather, refiners are also in the energy business. Unfortunately, as the Exxons and Shells have harvested their billions, refiners are enjoying less of the spoils. It stands to reason, these refinery owners won’t allow their margins to evaporate forever. If Crude parks at these levels, refiners will retaliate by raising prices for their finished product. When that happens, $4.00 unleaded will be around the corner. Couple this with another attack in Nigeria or strike in Venezuela, and $5.00 gasoline is not out of the question.

Looking at our proprietary rankings, energy once again occupies our top spots. Investors should consider these trends in refinery-based plays. Valero (VLO) and Tesoro (TSO) might be able to capitalize on rising margins for refineries. There are political considerations to make on this one — namely, election-year politicians are saber-rattling with the oil industry. Regardless of what happens to refineries, high energy prices are here to stay. Unfortunately, for my bank account, it will be a long time before I see $1.00 gasoline again.