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Market Watch The Refining Game !
Market Watch The Refining Game ! 
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Gold Futures, Weekly “All the taste with half the calories!” You’ve probably heard that old diet soda slogan. Soft drink companies sell a ton of the stuff. |
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| The Refining Game ! |
| Saturday, 13 October 2007 | ||||||||
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To some, this appears incongruous: With crude trading near all-time highs, the conventional wisdom is that these firms should be making record profits. But it's just not that simple. Obviously, oil producers tend to make more money when the price of crude oil rises. The oil exploration and production (E&P) side of the energy business is on fire right now. The weak link for most of the firms pre-announcing to date has been refining, perhaps the most misunderstood business in the energy patch. Valero is the largest independent refining firm in North America and derives almost all its revenues from that business. Chevron and Marathon are both integrated oil companies but derive about 25 percent and 50 percent of their operating profits, respectively, from refining. You can’t analyze any of these companies meaningfully without considering the profitability of the refining side of the business alongside that of E&P operations.
Refiners don’t make money by selling crude oil or, for that matter, natural gas. In fact, refiners are often actually hurt by rising crude oil prices.Although crude oil is the subject of endless chatter on the news, we don't really consume crude oil directly. You don't fill the petrol tank on your car with oil, nor do you run trains, home heaters, airplanes or power plants using crude oil. Crude oil is just a raw material; what we actually consume is refined product. Refined products include gasoline, heating oil, jet fuel and diesel. Refiners are key middlemen between crude oil and actual, usable products. These firms buy crude oil as the feedstock for their operations and produce and sell gasoline, diesel and other products. Therefore, they make money from the spread between crude oil prices and prices of refined products, not the price of crude or gasoline alone. If the price of gasoline rises faster than the price of crude, profit margins for refiners would tend to expand. And refiners can, of course, actually make money when crude oil prices are falling. For example, if crude prices are drifting lower but gasoline costs are rising or remaining steady, this will support refiners' margins. The basic measure of a refiner's profitability is what's known as a crack spread. The term comes from the fact that refiners are said to "crack" a barrel of crude to make products. The crack spread is generally calculated by comparing the cost of crude oil futures with the price of refined products futures--typically gasoline and heating oil futures.Excerpted from the : The Energy Letter This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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