With skyrocketing gasoline and diesel fuel prices, share prices of independent oil refiners, such as Frontier Oil, Valero Energy, Tesoro, Alon USA Energy, Western Refining, etc., all have a hefty advance. These share prices do not correlate well with the bottom line of these oil refiners though. While pipelines, oil producers and energy-service companies enrich their stockholders, oil refiners' shareholders suffer losses.
When their products are sold at 50% more than they did a year ago, it is difficult to believe the business of buying crude oil and turning it into different refined products e.g. gasoline, diesel fuel, jet fuel and heating oil, etc. is losing money.
Oil refiners bear heavy maintenance costs and big debt loads and invest billions to buy or build capacity. Unlike companies that both produce, refine and sell crude oil, such as ExxonMobil, Royal Dutch Shell or BP British Petroleum, oil refinery profit is tied to the "crack spread", which is the gap between the cost of crude and the price of refined products. As the crack spread narrows, oil refiners' profit vanishes as well. So, the oil refinery shares are sensitive to 1) the cost of crude oil and additives in comparison with the market price of the refined products and 2) the conditions that determine the widening and narrowing of the crack spread.
Today, oil refiners are squeezed as the price of crude is rising faster than the price of gasoline. For the three-year period starting from January 2004 through the end of 2007, the crack spread was wide and the oil refiners' profits soared. In May 2007, the spread between Brent crude and unleaded gasoline peaked at $28 a barrel, $8 above the normal historical spread of $20. The spread even reached $40 in some locations. However, the average crack spread vanished during last winter and was recovered to an average of $8.50 in the first quarter of 2008.
Slim crack spread has prompted some refiners to rush to buy oil on the spot market to get supplies under control before prices go even higher. That helps contribute to still-higher crude prices. If crack spreads were kept at 2007 levels, you'd be paying more than $4 a gallon in most of the U.S. and more than $5 in California.
Oil refiners' gross margins will remain to be slim and company earnings nonexistent until their biggest expenditure, crude oil, starts falling. Then, their bottom line will improve as crack spreads widen before prices of finished products retreat.
Comments?
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment