Why has the US refining industry been so profitable lately?
As you saw in the previous part of this series, the wider the crack spread for a refinery, the more profitable the refinery.
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Towards the end of 2010, crude produced domestically in North America started to fill up storage in the WTI pricing point of Cushing in Oklahoma. As you can see in the chart above, the price of WTI started to lag the price of Brent. The two have historically traded at similar levels.
The major reason why crack spreads for U.S. refiners have been wider than other regions of late is the discount that WTI crude (the American benchmark) trades at to Brent crude (a more “international” benchmark).
This discount of WTI price to Brent price has been elevated for almost four years now. You can see it coinciding with the era of extraordinary profitability for the U.S. refining industry. We talked about that more in Part 3 of this series.
The U.S. advantage
The other side of the profitability equation, prices received for refinery products, is also an advantage for American refiners. Processed crude (refined products) can be sold globally. So they move in line with international prices.
This means that while U.S. refiners get cheaper crude as an input (that is, lower costs), they also still get good international prices for their output (that is, higher revenues). Wider crack spreads!
Among the larger U.S. refiners, PBF Energy (PBF) reported one of the stronger refining margins of $15.44 for the first quarter of 2014. Refining margins measure operational advantage, reflecting crack spreads. PBF was followed by HollyFrontier’s (HFC) $14.75 margin for the same period. This compares to margins closer to $10 per barrel for larger refiners like Valero and Phillips 66. But among the top three refiners, Marathon Petroleum (MPC) reported a refining margin of $14.46, due to superior operational advantages like price realizations and refinery locations.
The PowerShares Dynamic Energy Exploration & Production Portfolio ETF (PXE) would also be a good way to get diversified exposure to some of the larger refining names, like Valero Energy and Phillips 66. Meanwhile, the Energy Select Sector SPDR Fund (XLE) ETF would be a good pick for more general exposure to the American energy sector.