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Oil refiners crushed by collapsing margins

The Irving refinery plant in Saint John, New Brunswick, on August 27, 2013.

Christinne Muschi/The Globe and Mail

U.S. oil refining margins are in full collapse and profit margins for the country's refining industry is almost sure to follow.

The 'crack spread' is an industry term for the difference between the price of crude and prices for petroleum products, like gasoline and heating oil, that are refined from it. The crack spread is a good gauge of profitability for the oil refining industry.

Rising oil prices have crushed U.S. crack spreads in recent months. From a high of $42 (U.S.) per barrel in late February, the widely followed 3-2-1 crack spread has fallen 72 per cent to 10.66.

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The chart above shows stock prices for two of the largest independent U.S. refiners, Valero Energy Corp and Tesoro Corp, compared with the active WTI Cushing 3-2-1 crack spread future. After tracking crack spreads reasonably closely from 2010 to late 2012, the stock shot higher.

To some extent, rising U.S. oil production justifies the higher stock prices – there's a lot more refining business to be done south of the border and revenues have increased. STILL, a 70 per cent decline in crack spreads will be an extremely difficult hurdle to overcome.

Canadian integrated oil companies like Suncor are benefitting from the higher oil price and are insulated from declining crack spreads. Over time, however, continued lower profits for refiners will reduce demand for crude and may have a depressing effect on North American oil prices.

Scott Barlow is a contributor to Globe Unlimited. Click here to read more of his work, and follow Scott on Twitter at @SBarlow_ROB.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More


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