Downturn Now Hitting The Refining Sector

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Downturn Now Hitting The Refining Sector
by Michael McDonald • February 17, 2016


[font color="blue"]Watch the “crack spread.”[/font]

By Michael McDonald, Oilprice.com:


As all energy investors know, it has been a terrible year for oil and natural gas companies. Many stocks are down half or more from their 52-week highs. Yet amidst the carnage, one energy group has held up very well – refiners.

Companies like Valero (VLO) and Phillips 66 (PSX) have traded flat or even moved higher over the last year. This reality has largely been driven by the glut of crude bringing down input prices for these firms while continued stable demand for gasoline and diesel has led to better crack spreads. The crack spread refers to the profit per barrel of oil that refiners earn from turning oil into finished products like gasoline, diesel, and jet fuel.

While 2015 was a strong year for downstream operators, refiners could soon follow oil companies’ downward trajectory. Crack spreads are increasingly coming under pressure as the laws of supply and demand come into balance.

Highly profitable crack spreads are drawing more refining capacity online and leading to more supply for many derivative oil products. Established refiners are struggling to combat already high inventories of gasoline and other products by cutting production at key plants, but that effort is unlikely to help sustain cracking margins over the short term.

Energy analysts are forecasting that cracking spreads will fall substantially and margins in certain areas of the country such as the Midwest are already under severe pressure or are even negative thanks to limited storage capacity for final delivery products. ....................(more)

http://wolfstreet.com/2016/02/17/downturn-now-hitting-the-refining-sector/