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How MPC’s Refining Margin Indicators Are Trending in 3Q16

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MPC’s refining earnings indicator

In the previous article, we examined Tesoro’s (TSO) refining index values. Now, let’s look at Marathon Petroleum’s (MPC) refining earnings indicators.

MPC’s refining earnings are impacted by the blended LLS (light Louisiana sweet) 6-3-2-1 crack, the sweet-sour differential, and the LLS-WTI (West Texas Intermediate) spread. According to MPC, a dollar-per-barrel change in the blended LLS 6-3-2-1 crack affects its annual net income by $450 million. Similarly, dollar-per-barrel changes in the sweet-sour and LLS-WTI spreads affect its income by $220 million and $90 million, respectively.

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MPC’s refining margin indicators in 3Q16

According to MPC, in 3Q16, the blended LLS crack has fallen by $0.87 per barrel to $6.8 per barrel over 2Q16. On a yearly basis, the crack has fallen. The LLS-WTI spread has also fallen on both a yearly and a sequential basis.

On the other hand, the sweet-sour differential has risen yearly, but it has fallen sequentially. The differential stood at $6.2 per barrel in 3Q16 compared to $6.9 per barrel in 2Q16 and $5.9 per barrel in 3Q15.

The falls in all three indicators in 3Q16 compared to 2Q16 imply that MPC’s refining earnings will likely fall on a sequential basis. On a yearly basis, the rise in the sweet-sour differential will presumably be offset by falls in the LLS-WTI spread and in blended LLS crack.

The iShares Global Energy ETF (IXC) has ~5% exposure to the refining sector.

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