Tony Daltorio, The Investment U Research Team

Quite simply, this is not a good time to be in the business of refining oil in the United States.

The obvious reason for this is the continuing recession which has led to lower demand for gasoline and other refined products. With the summer driving season past the halfway point, having the word ’staycation’ become commonplace is not good news for the refiners.

But that’s not all. And it goes well beyond simple economic downturn.

There are other factors at work. And unfortunately, many have escaped the notice of many investors and much of Wall Street.

While everyone was focused on the sharp rise recently of the price of WTI crude oil, other things have been conspiring against domestic refiners of all sorts. Here’s what you need to know and the two biggest reasons you should stay away at all costs.

Refiners’ Headache #1 – Higher Prices for Low-Quality Crude

There has been a remarkable move in the price between low-quality and high-quality crude oils.

OPEC’s production cuts, led by Saudi Arabia, have mostly removed from the market supplies of heavy, sour, low-quality oil. This action has forced low-quality crude prices to rise comparatively faster than those of light, sweet, high-quality varieties of crude oil.

This has caused the spreads between the varying qualities of crude to narrow – in some cases hitting eight-year lows – as OPEC’s campaign of production cuts has kicked in.

For the first part of this year, the discount between Mexico’s low-quality Maya oil and West Texas Intermediate crude oil has been $3.55 a barrel.

This figure is down about 70 percent from the 2004-2008 average of $12.30 a barrel. West Texas Intermediate and Mars oil, a medium-quality crude from the Gulf of Mexico, have traded at parity this year. This figure is down from the 2004-2008 average discount of $5.77 a barrel.

While higher prices for lower-quality crude oil may be good news for investors in Russian energy firms that produce a lot of heavy, sour crude, it is not good news for investors in U.S. refinery stocks.

The reduction in price differentials is reducing the profitability of modern, sophisticated refineries such as those in the Gulf of Mexico. These refineries have invested millions of dollars into complex units called cokers, which allow these refiners to turn low-quality oil into high-quality refined products such as gasoline and diesel.

The price differentials between various grades of crude have been a meaningful contributor to profitability for complex U.S.