Brad Zigler: A Primer On Oil Indicators

January 20, 2011

Wondering what all those indicators in the Weekly Oil Roundups mean? Wonder no more. We provide a primer on the most commonly used indicators in the petroleum markets.


Every week, when the U.S. Energy Department releases its petroleum inventory data, we take an in-depth look at the oil market, using several indicators measuring the industry's health from a refiner's standpoint (for examples, see the Wednesday Weekly Oil Roundup editions of Brad's Desktop).

The thinking behind this approach is simple. Better-informed consumers are less likely to be surprised by shifting price trends in crude oil and refined products, such as gasoline and heating oil. Investors, too, are better served if they understand the price pressures at the refining level.

The presentation of these indicators, however, prompts more than a little head scratching among new readers. "What's the significance of the differential in refining margins?" asks one reader. Another inquires: "Why should I care about a three-month roll in WTI futures?"

So, just as we did with our Friday Inflation Scorecard columns ("Deciphering The Inflation Scorecard: Why Gold?" and "Deciphering The Inflation Scorecard: Part 2"), we've put together a guide to our Wednesday Weekly Oil Roundup indicators.

Oil Refining Margins – Not all refiners are alike. Refiners make choices about the products they turn out based on equipment availability and market demand. Some refiners may concentrate on the production of lighter distillates, such as gasoline, while others tend to produce higher proportions of middle fuels, such as diesel and heating oil.

For lighter distillate refineries, a 3-2-1 "crack" is used as the standard mix: three barrels of crude oil yields two barrels of gasoline and one barrel of heating oil.

Refiners leaning toward middle distillates are proxied by a 2-1-1 crack: two barrels of crude oil yields one barrel each of gasoline and heating oil (heating oil and diesel are chemically similar and likewise priced alike).

Gross refining margins are derived by dividing the proceeds of product sales by the cost of the crude oil inputs. When the economy's perking along, selling gasoline is favored over diesel and heating oil, since consumers tend to drive more, increasing gasoline demand. Petrol consumption, in contrast, declines in bad times, along with motor fuel prices.

Thus, the peaks and valleys in the margin differential often confirm broad economic trends. 3-2-1 runs will tend to move to a premium over 2-1-1 operations in boom times and reverse to a discount in downturns.


Refining Margin Differentials Vs. S&P 500

Refining Margin Differentials Vs. S&P 500

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