I once had a billionaire ask for my advice about buying a refinery. What I told him was that if you get in at the right part of the cycle, next year you might make another billion dollars. Get in at the wrong time, and you are no longer a billionaire. Because it would have tied up a major part of his net worth, I advised him to stay away.

The refining business has never been for the faint-hearted, and most of the time neither is investing in refiners. We recommended them a year ago on the basis of a very large differential between mid-continent crude such as what’s produced in the Bakken (roughly represented by the price of West Texas Intermediate) and Brent crude, a marker for finished product prices. This differential significantly affects refiners’ margins. When that differential began to shrink and new regulations threatened to bite, we became cautious and moved our ratings in refiners from Buys to Holds.

The differential had been expected to decline because a number of pipeline projects promised to alleviate the bottleneck in Cushing, OK that was depressing mid-continent oil prices. Cushing inventories have begun to drop rapidly, which will help keep the WTI-Brent differential in check, unless mid-continent production continues to expand and starts to slow or reverse the inventory drop.

So what does this mean for refiners? The Brent-WTI differential remains under $10/bbl, and this means the current quarter will stack up poorly against the results a year ago, as was the case in Q2. That condition is likely to persist through the end of the year. This situation has been clear to us here for a while, but this week Simmons also downgraded the sector to Neutral because of concerns about refining margins in Q3 and into 2014.

But does “Neutral” or “Hold” really mean it’s time to sell? No, because there probably isn’t a lot of downside from here. The bad news that we expected to affect refiners should be mostly priced in at this point. But I also wouldn’t be a buyer yet at this point. The catalysts for the next move higher are not likely to occur for several more months.

The thing to watch is something we track biweekly in our Commodity Update, and that is the Brent-WTI differential. If that starts to increase, and especially once it’s shows improvement  year-over-year, that will signal that the fortunes for refiners are turning around and we will be ready to upgrade them.

Personally, I own Phillips 66 (NYSE: PSX), and have ever since it was spun off. I am a former employee and legacy shareholder of ConocoPhillips (NYSE: COP), and I received the shares when PSX was IPO’d. My PSX shares are down 13 percent over the past three months, but up 53 percent since their April 2012 IPO.

As a long-term investor, I see nothing that overly concerns me about PSX, or the longer-term prospects for refiners. But I am prepared to weather the ups and downs. If you are not comfortable with the possibility of seeing the occasional 20 percent slide, then the refining sector is probably not for you.