Short Term Crude Fluctuation Good for Refining
Yesterday's 5% drop in crude prices did not translate into a drop in refiners crack spreads. On the contrary, crack spreads went up almost in lock step with the drop in crude price (Cushing Spot WTI dropped $4.72 to $94.98, while while Spot 5-3-2 cracks rose $4.42 to $35.97).
In the very short term, this can be caulked up to the market taking a bit of time to catch up to changing conditions. Outside of a few "opportunity crudes", refiners are buying crude 30+ days out, so a quickly changing market can skew the numbers in the short term.
As I've mentioned before however, I think we are seeing a fundamental difference in how transportation fuels are being priced. Despite all the news reports over concerns for crude supply, the bigger issue is refining capacity. Whether crude is $10 or $100 a barrel, refiners can not run a single drop more through their facilities. They are all running at maximum capacity. Therefore, supply and demand pricing is moving from the supply of crude oil to the supply of refined product.
In this scenario, cheaper oil may mean little to no change at the pump, but increased profits for the refiners. Even when refiners have done well in the past, they've been at the mercy of the market, they had zero pricing power. They did not control the cost of oil, or the wholesale price of their products. For the first time ever, we could see that change.
Time will tell if this plays out, but so far the market tends to agree. I'm still looking (and adding) to pure play refiners. Hopefully I can share a few of the names I like the most in the near future.
Happy Hump Day!