Cracking The Refiners

Refiners have been beaten up and declining since late February, but the downtrend has shown signs of a pause in recent weeks. The sector has been pressured by a meaningful drop in crack spreads (profit margins) in part linked to a narrowing of the Brent/WTI spread.  The supply/demand conditions in the oil market seemed to tighten as highlighted by a sharp drop in U.S. inventories and pick up in refinery activity.
The crack spread or margins are a key price driver:
Refiners have differing input costs depending on their ability to source and crack differing grades of crude oil. As the graphic displays, the stock price of refiners tends to follow the direction of crack spreads or their margins.  The 3:2:1 crack is overlaid against the average price of Valero (VLO - Analyst Report), Western Refining (WNR - Analyst Report), and Tesoro (TSO - Analyst Report).  The 3:2:1 crack calculates the profits of converting three barrels of crude oil into two barrels of gasoline and one barrel of heating oil.

The graphic displays a generic view of margins using WTI crude oil for an input.  In reality, refiner profits are subject to the differing pricing of inputs.   There are light and heavy crude mixes and different prices among light and heavy crudes.    The Brent/WTI spread is an example of differing prices for light crude oil. These differentials can impact profitability.  (more)
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