BTIG Warns Oil Refining Stocks Face Correction Risk After Historic Rally

Oil refining stocks could be headed for a correction after a record-setting rally has left the sector looking historically overbought, according to a recent analysis by financial services firm BTIG. The firm highlighted several technical indicators suggesting that the positive fundamentals may already be fully priced into the shares for the near future.

Technicals Signal Overheating

BTIG's warning is based on the performance of the S&P 500 Oil & Gas Refining and Marketing Index (S5OILR), which has surged approximately 124% year-to-date. The firm noted this marks the index's strongest performance in three decades.

According to BTIG, several metrics point to an overextended market:

• The index is currently trading 122% above its 200-week moving average, the second-largest spread in its history.
• Its weekly Relative Strength Index (RSI), a measure of momentum, has reached 81, a level typically considered overbought.

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Historically, these conditions have preceded a downturn. BTIG's analysis found that in 7 of the 8 previous instances when the index's weekly RSI was above 80 while trading at least 50% above its 200-week moving average, the index declined. The median return over the following 12 weeks in those cases was -7.2%.

Market Outlook and Specific Stocks

BTIG compared the current setup in refining to the semiconductor and AI trade in late June, suggesting that strong fundamentals may be priced in for the next 6 to 12 months. The firm also pointed to a 1.6% decline in the Oil Service ETF (OIH) last week as a potential sign of broader weakness emerging in the energy sector.

Based on its analysis, BTIG identified several stocks that it believes present a poor risk-reward profile over the next four to eight weeks. These include Marathon Petroleum (MPC), Valero (VLO), Phillips 66 (PSX), PBF Energy (PBF), and Delek Holdings (DK). The firm clarified that it does not provide official ratings for any of these companies.