What Are the Correlations between Refining Stocks, Cracks, and SPY?



Refining stocks, cracks, and the broad market

In the last part of this series, we saw a correlation analysis of integrated energy stocks and crude oil prices. In this part, we will study the correlation between refining companies, the broader SPDR S&P 500 ETF (SPY), a benchmark refining crack spread, and the USGC WTI Cushing 3-2-1.

The correlation between refiners and the benchmark crack USGC WTI Cushing 3-2-1 shows a mixed trend. HollyFrontier (HFC) shows the highest correlation with the benchmark crack across all the periods. Tesoro (TSO) has a lower correlation. Phillips 66 (PSX) has the lowest correlation.

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The correlation values of refiners versus benchmark cracks differ largely due to the fact that refining operations are carried out in different locations. Plus, cracks vary from location to location and from plant to plant. Also, companies like PSX have other businesses that are not very affected by crack spreads like chemicals and midstream. That’s the reason for PSX’s low correlation.

Thus, the correlation between refiners’ stocks and any particular benchmark crack spread should not be relied on for investment purposes.

Refining stocks, SPY, and crude oil prices

On the other hand, the correlation between the broader market indicator like the SPDR S&P 500 ETF (SPY) and refining stocks is high. This is due to the fact that SPY is an indicator of the broad economy. So, when an economy grows, the refining sector also grows. This is due to the fact that when economic health improves, the demand for fuel increases, leading to higher prices and volumes of refined products.

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The correlation between economic growth and refining sector growth is also reflected in the short-term positive correlation between crude oil prices and refining stocks. The positive correlation is due to the fact that the rise in crude prices reflects the positive sentiment for the economy and markets. This pushes up refining stocks as well. However, on a long-term basis, refining stocks and crude oil prices are negatively correlated because when crude oil prices fall, product prices don’t fall that steeply, which leads to a widening of cracks.

If you are looking for exposure to refining and marketing sector stocks, you can consider the iShares U.S. Oil & Gas Exploration & Production ETF (IEO). The ETF has ~25% exposure to the refining sector stocks.


Thus, the direction of SPY can likely point towards the direction of refining stocks. The study of refining stocks and SPY reveals that based on the likely direction of markets, stocks could be selected. For example, if investors are looking for exposure to refining sector stocks and believe the broader economy will do well, they can consider Phillips 66 (PSX), which has the highest correlation with SPY. On the other hand, CVR Refining (CVRR) would likely provide some downside protection from weakness in the broad markets given its low correlation with SPY.


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