According to an April 23rd report from FactSet Insight, the oil refining industry is doing a whole lot better than than the oil and gas sector as a whole. There are a couple of reasons fort this. First, the fact that oil prices are down 50% over the last nine months just means a greater consumer demand for refined petroleum products. Moreover, refiners often benefit from the fact that prices for refined oil products don’t drop as rapidly as crude prices, which means they can make extra profits until the so-called “crack spread” eventually normalizes.
Oil refiners are bright spot in O&G sector
FactSet Assistant Vice President Jordan Kamps highlights that the refining industry has been a bright spot in a beaten up O&G sector. Oil refiners distill raw crude oil into products such as gasoline, heating oil or diesel fuel. Oil majors such Exxon Mobil and BP are called integrated oil companies, meaning they have refining divisions included in their overall operations. However, some large firms, including Valero and Tesoro, are only refiners.
A decrease in crude oil prices will result in lower profits for oil and gas companies in the future, but refineries can take advantage of lower input costs immediately. Keep in mind that since the prices of refined products generally don’t fall as quickly as crude oil prices, this means refiners can make higher profits. The price difference between crude oil and the refined products is called the “crack spread”, and is considered a key metric in the oil refining industry.
As the chart above makes clear, oil refining is the one and only industry in the Energy sector that is in the black over the last year, producing a total return of 5.8% for investors. Of note, with a total return of -7.6% for the last 12 months, was second behind oil refiners.