Oil Weakness Is Good for Refiners

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"Yesterday's blip in the refining margin could be transitory."

Oil's been giving traders a real roller-coaster ride. . .but the recent softness in crude prices can be a very good thing for refiners. That is, as long as demand for motor fuel and other distillates continues to rise.

Jet fuel demand took one in the shorts when Iceland's Mount Unpronounceable erupted and spewed ash all over the Great Polar Route. Futures traders leveled their sights on the NYMEX heating oil and ICE gasoil contracts as jet fuel hedges.

NYMEX Nearby Crude Vs. Refining Margin
NYMEX Nearby Crude Vs. Refining Margin

That dropped heating oil prices 2.5% yesterday, more than twice the drubbing given to gasoline, while crude oil also took some lumps. When we're talking about making money from refining, the object is to tamp down your input costs while boosting—as much as possible—the price obtained from the sale of your outputs. Refining margins are only now getting back to "normal" levels after months of volatility.

Yesterday, even with heating's beating, the margin for a 3-2-1 refining operation inched above the 15% level. Lately, excursions above 15% have been infrequent and fleeting. Over the last 12 months, margins have averaged just 12.5%. The five-year average for gasoline-heavy refiners is 17.5%.

The key to yesterday's margin improvement was a hard drop in crude oil prices (off 2.2%) coupled with a relatively modest decline in petrol prices (down 1.1%). So why doesn't a 2.5% dip in heating oil prices trump the oil price decline? Because the 3-2-1 refining mix is a springtime run that overweights gasoline production. The "2" in 3-2-1 stands for gasoline: three barrels of crude oil yielding two barrels of petrol, one of heating oil.

Yesterday's blip in the refining margin could be transitory. After all, we've had one-day excursions above this threshold in the past few months. But we're now in the season when margins typically improve. . .usually the result of product prices rising faster than input costs.

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