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Crude Oil Downstream Earnings Amass More Than Upstream

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Lower crude oil prices affect upstream sector

According to EIA (U.S. Energy Information Administration) data, financial results for globally integrated oil companies in 1Q15 show a focus on exploration and production of crude oil, the upstream sector. Total 2Q15 earnings for refining of crude oil into petroleum products, the downstream sector, were $22 billion, 54% lower than 1Q14.

Lower crude oil prices contributed to an 80% or $28 billion fall in profits in the upstream sector compared to 1Q14. Profits in the downstream sector, however, were the largest for any quarter since 3Q12, almost $6 billion or 95% higher than 1Q14. This offset some of the decline in the upstream segment.

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What is crack spread? Why did downstream earnings contribute more than upstream?

Crack spreads refer to the differences between wholesale petroleum product prices and crude oil prices. They can serve as an indicator of refining profits. North Sea Brent crude oil prices fell more than wholesale gasoline and heating oil prices, resulting in an increase in the margin from refining crude oil. A fall in crude oil prices and a rise in demand for gasoline and petroleum products are the main reasons for crack spread.

Who gains and who loses?

Crack spread increases the margins of refiners such as Marathon Petroleum (MPC), Valero Energy (VLO), Phillips 66 (PSX), Tesoro (TSO), CVR Refining (CVRR), DHT Holdings (DHT), Frontline (FRO), and Euronav (EURN). Crack spread also increases the margins of ETFs such as the PowerShares Dynamic Energy Exploration & Production ETF (PXE) and the VanEck Vectors Oil Refiners ETF (CRAK).

Crack spread enables refiners to purchase raw materials at lower prices so the margin of the profit will increase. Crude oil producers, on the other hand, lose profits due to a fall in crude oil prices.

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