What Crack Spreads Could Mean for Refining Margins in 1Q16



Refining margins indicators

In this part of our series, we’ll analyze the refining margin indicators published by refiners like Tesoro (TSO), Marathon Petroleum (MPC), and Valero Energy (VLO) in an effort to map the most likely margin trend this quarter.

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Tesoro’s refining index

Tesoro publishes refining index values that serve as regional crack indicators in the areas where its refineries operate. So far in 1Q16, Tesoro’s refining index values have plunged in the operating areas of California, the Pacific Northwest, and Midcontinent US—on a yearly basis as well as sequentially.

The index value in California stood at $12 per barrel in 1Q16 (quarter-to-date) compared to $17.8 per barrel in 1Q15 and $17.3 per barrel in 4Q15. Similarly, the Pacific Northwest and Midcontinent indexes values fell, yearly as well as sequentially, to $8 per barrel and $10 per barrel in 1Q16, respectively. This points towards the likely decline in TSO’s refining margins in 1Q16.

TSO’s crack spread in 1Q16

Tesoro closely tracks the ANS (Alaskan North Slope) West Coast 321 and WTI (West Texas Intermediate) Midcontinent 321 crack spreads. Both the crack spreads have dropped in 1Q16, yearly as well as sequentially. The West Coast 321 crack spread has declined to $14 per barrel in 1Q16 while the Midcontinent crack spread fell to $9 per barrel in 1Q16. Remember, this lower crack spread implies likely weakness in TSO’s 1Q16 refining margins.

Low refining margins also impact the earnings of refiners like Phillips 66 (PSX) and CVR Refining LP (CVRR). The Vanguard Total World Stock ETF (VT) has 10% exposure to energy sector stocks.


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