Why Oil Prices Have Crashed – And What Investors Should Do Now

Second, we should consider the different segments of the energy sector. When oil prices fall, typically oil producers get hit the hardest. Pipeline companies usually take a milder hit, and refiners often benefit because their margins expand.

That hasn’t been the case this time. At least not entirely. Two top oil producers, ConocoPhillips and EOG Resources saw declines in May of 3.8% and 8.2%. That’s especially modest considering the double-digit drop in oil prices.

Midstream companies held their ground. Enterprise Products Partners fell by 2.5% in May. Magellan Midstream Partners was one of the few energy companies that rose during the month (+1.1%).

The supermajors Chevron and ExxonMobil saw respective declines of 2.2% and 8.4%. Incidentally, this puts Chevron’s yield above 4%, which has historically nearly always been a good buy indicator.

But the big story is the refiners. The nation’s two biggest refiners, Marathon Petroleum Corp and Valero saw shares decline by 21.6% and 20.2% respectively. Valero’s yield has risen to a whopping 5.1%.

Refiners often trade out of sync with oil prices, but this time the concerns about overall demand, and higher-priced oil from Mexico as a result of tariffs, hit the refiners hard. Trade tariffs on Mexico could be a double-whammy if the country retaliates, because U.S. refiners send large volumes of finished products back to Mexico.

Bargains in the Refining Segment

Most segments of the energy sector are relatively more expensive than they were a month ago, considering the large drop in the price of oil. If the price remains in the current range for very long, oil producers and integrated oil companies will likely see larger declines.

The midstreams started the year undervalued, but after a large run-up many of them had reached fair value. Magellan Midstream was an exception, because it hadn’t gained as much as many of its peers. The stock was overdue; its May gain went against the rest of the energy sector.

All things considered, refiners are unlikely to suffer as much as the market fears. Further, lower oil prices will help lift gasoline demand, and that should help prop up margins. Refiners are the only sector that appear to have become bigger bargains following the oil price decline.

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