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Tickers in this Article: VLO, SUN, FTO, WNR, TSO
While the recent unexpected bout of colder-than-normal weather in the continental U.S. may have prompted homeowners to turn up the thermostat earlier than usual, any potential boost in demand for heating oil resulting from the unexpected chill is unlikely to prompt a material change to the challenging fundamentals now being faced by the nation's major refiners. IN PICTURES: 8 Tips For Starting Your Own Business

Refiners Margins Could Narrow Further
Since the recession took hold, demand for heating oil and diesel has basically tanked; falling further than at any time since Jimmy Carter sat in the White House. This slump in demand has drastically narrowed refining margins. Measured in terms of the "crack spread," or the premium on heating oil to crude oil, margins have fallen more than 73% over the past year, the biggest one-year dip in more than two decades. And by January, the peak of the winter heating system, that margin could fall even further, according to some analysts. Currently at about $8 a barrel, some forecasters are predicting it could go as low as $5 in coming months.

Heating Oil Demand No Longer as Sensitive to Colder Weather
The problem is that the market is awash with excess refined product. Stockpiles of heating oil and diesel are at the highest levels since 1983, and 30% above their five-year average trend levels. It would take a huge jump in demand to get rid of this excess inventory, something that's unlikely to happen as home owners stung by previous years' price increases have invested in insulating their homes, thus reducing demand. Demand could also fall as home heating budgets fall victim to job losses. Remarkably, even if this winter's temperatures come in at 10% below current projections, home heating bills are still expected to decline by 2%, according to the U.S. Energy Department.

Refiners Struggling to Cut Production and Conserve Cash
Small wonder that refiners like Valero (NYSE:VLO), the nation's largest, and Sunoco (NYSE:SUN) have been scrambling to cut production by taking the drastic step of shutting down their existing refining capacity. Valero is now mulling "strategic alternatives" for any or all of its 16 refineries, which could also include possible sales, but raising any cash from a sale could prove difficult. The company's Aruba refinery has been on the block since 2007, and so far there have been no takers. Sunoco's approach to solve its own cash crunch recently involved a 50% cut in the common share dividend, from 30-15 cents. (Learn about the impact of dividend cuts in The Importance of Dividends.)

Analyst's Universally Bearish on Sector
Analysts appear universally glum on the industry. According to forecast data compiled by Bloomberg, all nine of the publicly-traded independent refiners are expected to lose money in the third quarter, including Valero, Sunoco as well as smaller operators like Frontier (NYSE:FTO) and Western Refining (NYSE:WNR). A recent review of consensus recommendation data also compiled by Bloomberg, reveals that, of the seven stocks in the Standard & Poor's 500 index that have no "buy" recommendations whatsoever, refiner Tesoro (NYSE:TSO) tops the list. (For more on analyst expectations, be sure to read Analyst Recommendations: Do Sell Ratings Exist?)

The Bottom Line
Not withstanding the current cold spell, the long-range weather forecast from the U.S. National Oceanographic and Atmospheric Agency (NOAA) still forecasts a 1 degree warmer winter this year than last year. If that transpires, the heat could really be turned up on the refiners, prompting even more drastic moves than have already been taken. And that won't be good news for shareholders.

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