Lehman Brothers downgraded Valero Energy (VLO

) and Frontier Oil (FTO

) to equal-weight and downgraded Tesoro Petroleum (TSO

) to underweight.

Analyst Paul Cheng says despite a recent sharp run up in share prices for the independent refiner group, he remains cautious about the sector's underlying fundamental outlook over the next six to 12 months. Cheng expects 2003 refining margins will average below the historical norm.

He thinks current expectations for the group is too high, and also thinks refining margins reached their near-term highs in November and have since declined as continued weakness in gas prices more than offset distillate prices.

Cheng notes despite unseasonally strong gas demand, gas margins have been unable to hold ground due to waves of high imports from Europe arriving in November.