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Sector Spotlight: Energy Refiners Shine as Crude Oil Sinks

March 21, 2016
Downstream pipeline: How refineries and downstream energy companies shine when crude is inexpensive

Go ahead and blame all the market's ills on oil. Although it may be an exaggeration, the correlation between crude oil and U.S. equities has spiked over the last few months. Many investors simply shunned the entire energy sector as the collapse from over $100 per barrel in the summer of 2014 to under $30 barrel in the past few weeks decimated revenues and profits at many energy firms.

Within the sector there was a bright spot that managed to rise above the carnage in 2015. That special group is refiners, which fall into the downstream category of energy companies.

Think we’re going fishing downstream? Think again. You may have heard the terms: upstream, midstream, and downstream. Here's a quick primer on what they all mean in the energy patch.

A Briefing on Energy Streams

The U.S. oil and gas markets are broken down into three main segments, explains Mike Ciccarelli, stock and commodity trader at

  • Upstream: The companies that find oil, drill for oil, and extract it
  • Midstream: The companies that process, store, and transport oil (to the downstream)
  • Downstream: The companies that refine crude oil into end products (gasoline, diesel, and jet fuel), market those products, and sell them (think gas stations, for example)

Then there are the so-called "supermajors," which include integrated oil and gas companies that tackle it all: the upstream, midstream, and downstream segments of the oil and gas market.

"The six supermajors in the world include ExxonMobil [XOM], Royal Dutch Shell [RDS.A], BP [BP], Chevron Corporation [CVX], ConocoPhillips [COP], and Total S.A. [TOT]. When people refer to the supermajors, they are defining them as the largest non-state-owned oil companies in the world," says Ciccarelli.

Focus On Downstream

There’s been a silver lining for the refiners and companies that take crude oil and turn it into products like gasoline, diesel, and heating oil. In 2015, the oil and gas refining and marketing sub-sector in the S&P 500 energy sector produced a whopping gain of 24.6% over the year. That compares to a 23.6% plunge in the broader energy sector. The plunge in oil prices simply means refiners’ input costs are lower, which translates into the potential for higher profits.

"Lower West Texas Intermediate [WTI] oil prices are positive for U.S. refiners. WTI oil prices and U.S. oil refiner margins are typically negatively correlated. Companies like Valero [VLO], the world’s largest independent refiner, see an increase in refining segment operating income when they see wider discounts for sweet and sour crude oils," says Ciccarelli.

Other oil and gas refining and marketing companies include Phillips 66 (PSX), Marathon Oil Corporation (MRO), Tesoro (TSO), and HollyFrontier (HFC).

The formula that helped boost refiners in 2015 has evaporated since the start of the year. The oil and gas refining and market sub-sector fell 19.6% through February 19, while the S&P 500 energy sector declined 4.8%, according to S&P Global Market Intelligence data. "After rallying for almost five years, share prices of many U.S oil and gas refiners have been pulling back since December as rising gasoline supplies, as well as other fuel products, have hurt refiner margins," Ciccarelli says.

Blame It on the Cracks

This dynamic means crack spreads are under pressure, Ciccarelli says. Crack spreads are simply the differences between wholesale petroleum product prices (think gasoline or distillate fuel) and crude oil prices. "The glut in gasoline inventories are bad enough that some refiners in the U.S., including Valero, are reducing crude oil processing." Also, the El Niño–inspired warmer winter temperatures didn't do refiners any favors this winter, as weaker-than-expected demand for heating oil hurt prices there.

Keep In Focus

For now, refiners may need to balance out supply and demand just as the broader energy sector has had to do, but low crude oil prices could continue to provide support to this sub-sector.

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