uploads/2016/10/IV-8.png

Why Is the Crack Spread Fueling Volatility in Refining Stocks?

By

Updated

High implied volatility

As of October 6, 2016, Calumet Specialty Products Partners (CLMT) had the highest implied volatility among our list of integrated energy and refining companies. Below are its volatility figures:

  • implied volatility – 67.6%
  • 15-day average implied volatility – 63.7%
  • current volatility – ~6.2% higher than its 15-day average
Article continues below advertisement

What’s fueling the volatility in refiner stocks?

The rise in Calumet’s implied volatility stems from the 59% YoY (year-over-year) fall in its EBITDA (earnings before interest, tax, depreciation, and amortization) in 2Q16. It fueled the bearish sentiment in Calumet.

Now, let’s look at the volatility of other integrated energy and refining stocks as of October 6:

  • Alon USA Partners (ALDW) implied volatility – 66.8%, or ~15.6% less than its 15-day average
  • Alon USA Energy’s (ALJ) implied volatility – 64.2%, or 1.8% higher than its 15-day average
  • Delek US Holdings’ (DK) implied volatility – 59.8%, or ~8.4% more than its 15-day average
  • CVR Refining’s (CVRR) implied volatility – 59.4%, or ~4.6% less than its 15-day average

Overall, a weak refining environment and volatility in oil and refined product prices can cause volatility in these downstream energy companies. The refiners discussed above are among the smaller refining companies in the US. They have concentrated operations compared to their larger peers. They correlate more with the crack spread compared to US crude oil in the past month. It could be one of the important factors driving the implied volatility for these stocks.

Low implied volatility

As of October 6, ExxonMobil (XOM) has the lowest implied volatility figure among integrated energy companies and refiners. Below are its volatility figures:

  • implied volatility – 17.2%.
  • 15-day average implied volatility – 17.2%
  • current implied volatility – at par to its 15-day average

Now, let’s look at some other integrated energy companies and refiners with low implied volatilities as of October 6:

  • Chevron’s (CVX) implied volatility – 19.3%, or 2.5% higher than its 15-day average
  • BP’s (BP) implied volatility – 21.7%, or 2% less than its 15-day average
  • Royal Dutch Shell’s (RDS.A) implied volatility – 22.8%, or 0.5% less than its 15-day average
  • Total SA’s (TOT) implied volatility – 23.4%, or 2.4% less than its 15-day average

As you can see above, all of these low implied volatility companies are integrated energy companies. They have integrated and diversified business models by business and geography. It reduces the volatility in their earnings.

These low implied volatility companies correlated less with crack spreads than with crude oil prices between September 6 and October 6, 2016. ExxonMobil had the lowest correlation of 68.4% with crude oil prices in the past month.

In the next part, we’ll look at integrated energy companies and refiners’ returns. Usually, weaker stocks that fall sharply or that have negative news announced about them experience higher volatility.

Advertisement

More From Market Realist