Refining margins in the first quarter
Refining margins mainly impact refining earnings. Leading US refiners publish refining margin indicators periodically, which show how the margins could be trending. Analyzing these indicators could give us a sense of the direction of a company’s refining margin and earnings in its next earnings.
Valero Energy (VLO), Marathon Petroleum (MPC), and HollyFrontier (HFC) publish refining or earnings indicators regularly. While HollyFrontier publishes the refining index, Marathon Petroleum and Valero Energy publish the blended crack spreads and regional crack indicators.
USGC WTI 3-2-1 crack in the first quarter
The USGC WTI 3-2-1 crack, the industry benchmark crack, shows how much refiners earn when they process three barrels of crude oil—namely WTI—to generate two barrels of gasoline and one barrel of distillate. The crack is an essential indicator for refiners that have capacities in the US Gulf Coast.
Phillips 66 (PSX) refined 36% of its total throughput in the US Gulf Coast in 2018. Reviewing the USGC WTI 3-2-1 crack trend in the current quarter could point to the company’s likely margin trend in the first quarter.
The USGC WTI 3-2-1 crack has risen 66% since January 2, the beginning of the current quarter, to the current level of $20 per barrel. On an average sequential basis, the crack is still lower. The USGC WTI 3-2-1 crack is ~8% YoY lower at $14 per barrel sequentially in the first quarter. The level could pressure refiners’ margins.