This from Katherine:

While most oil companies continue to report less than desirable earnings results, one refiner recently reported improved refining margins, announcing a 51% increase from one year ago.

Based in San Antonio, Tesero Corp. (NYSE: TSO), one of the leading independent refiners and marketers of petroleum products, reported quarterly profit of $97 million, compared with a loss of $40 million just a year earlier.

Yes, that’s in spite the precipitous fall in oil prices.

Other areas of the company’s operations saw an increase as well, including its operating income, which was $196 million higher than the fourth quarter of 2007. This was in part due to success in its Hawaii and California regions, as well as improved results in retail.

Increased crude recipients in Los Angeles were partly responsible for the success in Tesoro’s California region. And a 10% increase in heavy crude helped its Hawaiian region report favorable earnings.

“The actions we’ve been taking since late in 2007 have positioned the company to succeed even in this weak market environment,” said Bruce Smith, Tesoro’s Chairman, President and CEO.

“While falling commodity prices did benefit our wholesale and retail marketing channels, the capital and non-capital initiatives we implemented beginning in early 2008 have enhanced our ability to deliver substantial and sustainable improvements in our capture of the available margin, and I am pleased to see these successful efforts reflected in our fourth quarter results.”

Tesoro was able to increase crude flexibility and distillate production, which helped its margin realization. It took great pains to take full advantage of production, which led to a 4% increase in diesel and jet fuel compared to 2007’s fourth quarter.

Another important aspect of Tesoro’s accomplishments in such an otherwise dreary market was its ability to decrease costs. Direct manufacturing costs were $248 million in the fourth quarter compared to $300 million in the third quarter.

Capital spending for the entire year was $724 million, down significantly from the $932 million it spent in 2007. It says it expects its expenses for 2009 to be around $600 million, an even better improvement than it already reported.

“While the strength in first quarter West Coast margins has been a pleasant surprise, we plan to continue to follow our 2009 business plan which is based on industry benchmark margins that are lower than 2008, and our expectation that we will realize continued improvement in margin capture. Our program of non-capital objectives and benefits of our 2008 income capital spending is resilient and continues to provide the platform for our organic growth opportunities,” said Smith.

The company has obvious investment merit. To endure the fall in oil prices from $147 a barrel to under $40 – yet still improve margins, is significant. If anything, Tesoro represents a great way to keep your portfolio diversified with exposure to the energy sector.

Source: Tesoro Corporation (NYSE: TSO): Stock of the Day

You shouldn’t be one of them – at least not if you took our advice to buy gold stocks, as we’ve suggested for some time now.

If so, you’ve likely enjoyed double- and triple-digit returns since September. And there’s more to come for gold. But be careful. The price of gold and gold shares will not move up in a straight line. Here’s why…

Massive Stimulus = Three Huge Rallies In The Next 12 Months

Over the next few months, the talk will be of deflation, not inflation. Actually, what people should be talking about is “disinflation.” That means the slower growth in prices, not necessarily the technical definition of deflation, which is when prices actually fall and are expected to fall further.

Monetary policy does not have immediate effects. But the Fed’s new policy to buy any and all securities by way of its massive balance sheet should act as a major stimulus to the market by mid-summer.

Add to this a massive stimulus package, which will be announced on January 21, as soon as President-elect Obama is behind the desk at the Oval Office… and you have the makings for three major rally points in the coming 12 months.

Rally #1: Gold and silver

Rally #2: Commodities

Rally #3: Financial and insurance stocks

Let’s see why…

Gold

Gold will rally because of the very simple fact that the Fed and governments around the world cannot print so much money without debasing their respective currencies.

This is not idle conjecture. It will happen.

Paper is infinite… gold is not. And the balance could send gold – and gold shares – to the moon in coming years.

What should you do?

Wait for the inevitable pullbacks in gold and gold shares to load up. We’re talking about companies like Goldcorp (NYSE: GG) here.

These pull backs will come when the numbers that come out in the coming months, which will continue to point to more slowdown.

Remember, monetary policy takes time to trickle down, usually 6 to 9 months.

Commodities

Commodities will rally on the back on infrastructure spending and demand for oil and gasoline, which will be ignited by government policy and the increased consumption by consumers as low prices act as an incentive to use more oil.

What should you do?

Selectively invest in infrastructure shares and to buy oil and oil related companies. In this area, we’re looking at General Electric (NYSE: GE), which also just reaffirmed its 2008 profit forecast and 2009 dividend payment plan, as well as refiners like Tesoro (NYSE: TSO).

Financials

Finally, financial stocks will benefit (those that have survived, of course), as the government buys more of their assets, thus cleansing their balance sheets and income statements in future quarters.

What should you do?

In bailing out Citigroup (NYSE: C) shareholders, the U.S. Treasury sent a strong signal that it will not allow major failures and it will not penalize shareholders either.

Banks will also benefit from the spread between their borrowing costs at the Fed window, which will be low for some time to come, and the rate at which they lend the money out (when they start lending again in earnest).

Don’t expect great results in the first or second quarter, but look for opportunities to buy financials on major dips. Consider re-financing your mortgage, too, as you may see sub-4% mortgage rates in the near future.

The Smart Profits Bottom Line

The moves by the Fed and foreign governments are unprecedented.

They are lowering interest rates and printing money – not just to stimulate economic growth, but also to fight off a Depression.

Will they succeed? Most likely, yes. And that means you’ll want to be on the right side of the reflation that will occur in the months and years ahead.

At the Xcelerated Profits Report, we’ve taken positions in all three of the above-mentioned sectors in order to grow wealth. So can you – and we’ll show you how to do it like the pros do. Faster and with less risk than the regular crowd. For more information, click here.

Source: Federal Reserve Slashes Interest Rates Again… Why You Should Go For Gold, Commodities, And Financials

Meanwhile, Royal Dutch Shell also was able to breakthrough the $10 billion level when it reported second-quarter income increased 33% from $8.67 billion to $11.56 billion.

On July 11, oil futures hit an intraday high of $147.27, but since then have dropped to the low $120s-level. Oil for September delivery closed at $124.08 yesterday on the New York Mercantile Exchange.

But even high oil prices couldn’t help the two companies beat analyst expectations, causing both stocks to take a hit. Exxon Mobil shares dropped $3.95, a decline of 4.68%, to close at $80.43, while Shell’s A-shares shed $2.90, a decline of 3.94%, to close at $70.79.

“If oil prices are going up $20 and $30 a barrel a quarter like they have been, it hides a lot of flaws,” Brian Gibbons, an analyst at New York-based CreditSights Inc. told Bloomberg News. “The question on everyone’s mind is, how [does Exxon] expect to grow production given the restrictions on access to reserves?”

Oil Production Problems

Production is down at both Exxon Mobil and Shell as their current oil fields mature. Both are spending billions on research and development of new fields, as well as projects such as tar sands fields, which were previously considered unprofitable. But it could be several years before these new explorations pay off.

Exxon Mobil’s oil and gas production declined 7.8%, Bloomberg reported, due in large part to state seizure of company assets in Venezuela.

Shell has had tremendous difficulties with its Nigerian holdings, as continued attacks by the Movement for the Emancipation of the Niger Delta, or MEND, have had a serious impact on the region’s production.

In June, Shell was forced to shut down a site that had produced 220,000 barrels per prior to an attack. And earlier this week, the Dutch oil company declared force majeure on its Nigerian exports after yet another attack.

“We had just this Monday the close-in of Nembe Creek, which is an additional 40,000 barrels per day,” Shell Chief Executive Officer Jeroen Van der Veer said, Reuters reported. “It’s too early to say how long that will last.”

Shell’s production slumped 1% in the quarter, to 3.05 million barrels of oil a day, MarketWatch reported.

Dip in Oil Demand

At the same time, oil majors are faced with declining demand as high oil prices are forcing budget-conscious consumers to change their habits to reduce oil use.

“People have changed their driving patterns because of high prices,” Lynn Westfall, chief economist at Tesoro Corp.’s (TSO), a San Antonio refiner said, DowJones reported. “The earliest would be next year sometime before we might see a reversal.”

U.S. demand for gasoline declined 3.2% in the month ending July 25, the Energy Department announced. Tesoro’s Westfall said the decline was due to changing driving habits, rising unemployment and the increased popularity of more fuel-efficient car models.

In many ways, these changes in consumer preferences are more than just a short-term fix. With oversized sport-utility vehicles going the way of the dodo, some of that consumer demand is unlikely to ever return, even if gas prices eventually come down from their current highs.

Source: Exxon Mobil and Shell Post Record Income but Demand and Production Weigh on Shares

What we can say is that oil is still sky high at $139 a barrel.

Shock Market Trader editor Mike Burnick says there could be a painful correction around the corner. If there is, there’s one sub-sector of the energy industry that would actually benefit big time from such an oil correction: refiners…

Since 2001, the price of a barrel of oil has risen more than 600% to a recent high of US$145. The price of unleaded gasoline however has jumped “only” 300% or so over the same time frame to a recent price of US$4 per gallon.

Stuck Between High Taxes and Refining Costs

That math just doesn’t add up if you’re in the refining business. Not surprisingly, the price of oil is the biggest factor that determines the price of gas. In fact, crude oil accounts for 75% of the total cost of gasoline. The other next two biggest factors (at about 10% each) are taxes, and refining expenses.

There’s no way to avoid the taxes. One of the Presidential candidates proposed temporarily suspending Federal taxes on gas recently. But then someone pointed out that nobody would fix the potholes or widen the lanes on the interstate highway system if they stopped collecting gas taxes. That comment effectively silenced the idea.

So with taxes pretty much a “fixed cost” and crude prices escalating, the companies that refine oil into unleaded gasoline and diesel have been caught in a squeeze play. And it has decimated their profit margins.

In fact, profits at U.S. refinery operators plunged 98% in the first quarter because they were caught behind-the-curve on skyrocketing oil prices. Refiners have been raising prices to be sure. But they just haven’t been able to hike prices for gasoline, heating oil, and jet fuel fast enough to keep up.

To Know When Refiners Are a BUY Again…Keep an Eye on the Crack Spread

As a result, refinery stocks in the S&P index have been clobbered. These stocks have sunk 40% even as oil prices set new record highs. But the key to refinery profits is what’s called the crack spread.

The crack spread is the theoretical profit margin a refiner should earn from processing three barrels of crude into two barrels of refined gasoline and one of heating oil. That spread has plunged 38% over the past year. And it’s taken industry profits down the drain along with it.

But crack spreads, like so many relative price relationships in financial markets, are constantly shifting from peak to valley and back again. Last year the crack spread for refiners was almost US$23, today it’s just under US$14 — a big shift.

As you can imagine, this huge shift has come from crude oil’s unusually strong advance. Falling crude prices however can actually be a boon to refiners. “You really want to own refiners when oil’s going down, and not straight up,” according to Cambridge Energy Research.

But now energy sector fortunes may be reversing. At least that’s what smart-money investors, including industry insiders and hedge fund mangers, are saying.

In the last month alone, refining company executives have purchased US$2 million worth of their own shares, according to Bloomberg. That’s more insider refiners buying than at any time since 2000. In fact before March of this year, insiders had been very consistent net-sellers of refining stocks — “dumping more shares than they bought every week since 2003.

“Anyone right now buying the refiners would have to be banking on a pullback in oil prices,” according to one fund manager interviewed by Bloomberg.

A Lower-Risk Way to Make Money Off a Widening Crack

Buying the refinery sector right now just might be your best bet among the various energy sector plays, especially considering the “speculative” overbought state of crude oil futures at the moment.

Unfortunately, there’s no ETF I know of that gives you a broad based bet on the refining sector, at least not yet. Several leading refiners including Valero Energy (VLO) and Tesoro Corp (TSO) are among the stocks with big recent insider buys, according to Bloomberg.

This should even make a good “pairs-trade” strategy for you. Typically a pairs-trade involves going long one stock or ETF — in this case a refiner. Meanwhile, you would sell-short another major, integrated oil firm like say, Exxon Mobil (XOM) at the same time.

But here’s a pairs-trade twist that goes long-long — perfect for retirement accounts.

Buy the ProShares UltraShort Oil & Gas (DUG), which is designed to go up in price as the overall energy sector declines. At the same time, buy your favorite refiner, and earn potential gains as the razor thin crack spread widens again.

Source: What to Buy Before the Oil Bubble Busts

This beaten-up environment is where our colleague Jeff Clark tends to make an absolute fortune trading “rebounds.” On May 12, Jeff told S&A Short Report readers the refiners were due for a bounce and recommended a leveraged trade on Tesoro, one of America’s largest refiners. His readers closed out half the position for 36% gains in less than a month.

If oil continues to decline from its extended levels, expect more gains from Tesoro and the rest of the refinery gang. Also, expect Jeff’s readers to make a ton of money with the best trader we know. Click here to learn more about a limited-time offer to get the S&A Short Report… before the price of Jeff’s in-demand advice is set to double.

Source: An Oil Tip from the Best Trader We Know

Now, Congress has voted to stop adding oil to the national Strategic Petroleum Reserve (which was created in the 1970s to smooth out pricing disruptions and supply problems).

Talk about missing the point!

Sure you could argue that by putting less into the strategic reserves we could take some of the pressure off price… and by implication help bring it down from its record level at more than $130 a barrel.

I mean it sure sounds good in theory, especially in an election year. But in reality the strategic petroleum reserves would last only 2 months, even if we cut off all imports tomorrow. So there’s simply not enough volume to make a dent in recent price hikes.

Nor can we drill or refine our way out of this mess, as President George Bush seems to favor. In a recent interview with Yahoo! News, the president suggested both as alternatives when in reality we can do neither.

For one thing, refiners are the ultimate middlemen and they’re pinched at these prices. They simply can’t make money as they try to refine an increasingly expensive product and sell it to users who are chaffing at $4 a gallon. That’s why stocks like Western Refining Inc. (WNR), Tesoro Corp. (TSO), and Valero Energy Corp. (VLO), for example, have fallen by nearly 30-40% in recent months. Their margins get worse with each up-tick in oil prices from here on out now that we’ve reached a point where high prices are beginning to dampen demand.

For another, drilling and refining our way out of this assumes we have oil to begin with… we don’t. And even if we turn the Alaskan Tundra into Swiss cheese, the demand reduction we’re seeing here in the United States is being dramatically offset by developing countries that are guzzling gasoline at unprecedented rates.

In fact, those are precisely the reasons that I’ve been predicting for years that oil prices were headed skyward and why I’ve just recently boosted my target price for crude oil to $225 a barrel.

For what it’s worth, here’s my simple three-step plan.

1. Encourage people to use less. This is not rocket science, guys, and I have no idea why our leadership can’t understand this but apparently logic doesn’t apply inside the Beltway. Our current fuel standards literally date to the 1970s and pre-date the emergence of both mini-vans and gas guzzling SUVs. They average 25 mpg when we all know damn well that manufacturers around the world are fully capable of building 40-50 mpg cars and are doing so for other markets like Europe and Asia where…taa daa…they sell a ton of small, zippy, gas-efficient vehicles.
2. Create incentives for this to happen. Instead of providing pork laden tax breaks to the oil industry and stimulus packages that are simply nothing more than a glorified handout, why not shift the money to the consumers who need it? Seems to me that once people figure out they have a meaningful and lasting way of saving money, they’ll not only make it happen, but line up immediately to get started.
3. Reward those that develop alternatives. We have some of the best brains in the world in places like Silicon Valley and our University System. The fact that they’re not working overtime on this issue suggests to me that they’re not being prodded in the right place. We would easily jump start this process and conservation by rewarding alternative development and usage.

Call me crazy, but there’s a reason why they call it “supply and demand.”

The bottom line is that if we demand less, prices will come down.

Source: The Only Three Moves That Will Stop the Oil Price Advance