Crack Spreads Surge
Unlike most other energy stocks that are largely driven by oil and natural gas prices, refiners are more concerned about the spread between crude oil and refined product prices, also known as the "crack spread."
The crack spread "measures the difference between the purchase price of crude oil and the selling price of finished products, such as gasoline and distillate fuel, that a refinery produces from the crude oil," according to the Energy Information Administration. "Crack spreads are an indicator of the short-term profit margin of oil refineries because they compare the cost of the crude oil inputs to the wholesale, or spot, prices of the outputs."
If there's one area of the energy industry where Harvey has had the greatest impact, it's refining margins. Analysts at Raymond James and Wells Fargo estimate that 2 million to 3 million barrels per day of refining capacity―equal to 15% of the nation's capacity―are offline due to the storm, tightening supplies of gasoline, diesel and other refined products.
The 3-2-1 crack spread, which roughly measures the profit margin of a refinery that processes three barrels of crude into two barrels of gasoline and one barrel of diesel, surged 37% since last week, as product prices soared while crude prices faltered.
With many refineries likely to be offline for some time due to extensive flooding, crack spreads and refining stocks may remain well-supported, said analysts.
Periods Of Disruption
"Overall, each refining company will tend to benefit (at least from a margins, earnings, and stock price perspective) from periods of disruption like this, even if they have assets affected," analysts at Raymond James wrote on Monday.
Wells Fargo analysts agree. "Crack spreads are likely to remain elevated and refining equities are likely to respond positively," they wrote on Sunday, while adding that refining stocks have outperformed the broader stock market by 6% to 19% in the 10-20 days following a major hurricane landfall.
On the other hand, Barclays analysts cautioned that refined product cracks are likely to sag in the months ahead, depending on how quickly refineries return.
"The post-hurricane trend is clear: the strength in cracks may be short-lived, with the 3-2-1 crack halving in subsequent weeks despite the hurricanes’ impact on refined product supply," they said.
Contact Sumit Roy at [email protected]