Friday, February 19, 2016

Downturn Now Hitting The Refining Sector (CRAK; PSX; BRK.a)

There's so much stuff, everywhere. So much oil, so much gasoline, so much ethanol.
First up, Reuters:

Wall Street opens lower after rally in oil fades
U.S. stocks opened lower on Friday as a rally in oil prices fizzled out and data showed that inflation firmed in January, that could allow the Federal Reserve to gradually raise interest rates this year....
And from
As all energy investors know, it has been a terrible year for oil and natural gas companies. Many stocks are down half or more from their 52-week highs. Yet amidst the carnage, one energy group has held up very well – refiners. 
Companies like Valero (VLO) and Phillips 66 (PSX) have traded flat or even moved higher over the last year. This reality has largely been driven by the glut of crude bringing down input prices for these firms while continued stable demand for gasoline and diesel has led to better crack spreads. The crack spread refers to the profit per barrel of oil that refiners earn from turning oil into finished products like gasoline, diesel, and jet fuel. 
While 2015 was a strong year for downstream operators, refiners could soon follow oil companies’ downward trajectory. Crack spreads are increasingly coming under pressure as the laws of supply and demand come into balance. Highly profitable crack spreads are drawing more refining capacity online and leading to more supply for many derivative oil products. Established refiners are struggling to combat already high inventories of gasoline and other products by cutting production at key plants, but that effort is unlikely to help sustain cracking margins over the short term. Energy analysts are forecasting that cracking spreads will fall substantially and margins in certain areas of the country such as the Midwest are already under severe pressure or are even negative thanks to limited storage capacity for final delivery products.
 The situation is little better overseas. Asian fuel producers are facing increasing competition from China, which is exporting a surging level of refined crude products. Chinese net product exports are forecast to rise by 31 percent this year over and above robust export increases last year. Diesel exports rose 75 percent from China last year much to the chagrin of Indian and South Korean refiners. 
Just like in the U.S., margins for cracking have fallen hard as new supply has rushed to take advantage of lucrative opportunities in the field. Singapore Dubai cracking margins are running around $1.90 per barrel so far for 2016 versus $3.96 a barrel in the fourth quarter of 2015. 
China is hurting refiners and the global petroleum market in two ways then. First, the sudden shift in Chinese economic models has curtailed domestic oil demand, leading to falling oil prices and falling domestic demand for industrial oil derivatives. Second, to help Chinese refineries cope with the new harsh market conditions, China has started allowing many independent Chinese refineries to ship their output abroad. Diesel margins are particularly at risk as the product has seen a significant slowing of domestic Chinese demand and thus a very rapid build in export volumes....MORE
This is what I was getting at, although maybe leaning too heavily on the snark, when Van Eck introduced the Market Vectors Oil Refiners ETF at $20.00 back in August: "The World Cries Out For A Pure Play Oil Refinery ETF; Market Vectors Responds (CRAK)":
Why do I have this nagging suspicion that crack spreads are going to pull in?...
Which was followed two days later by "Gasoline Glut To Hit Refiners: Wood Mackenzie (CRAK)".
See also last week's "Oil: Buffet's Favorite Refiner Trying To Get Rid Of Excess Crude, Price Collapses (PSX; BRK.a)":
For the last month or two each time Berkshire Hathaway bought more Phillips 66 you'd see headlines like "As Warren Buffett Buys More Phillips 66, Is He Calling a Bottom?" and the temptation would be to put up a post explaining that refiners were a bet on the crack spread and not on the price of oil. 
But we didn't. 
Sometimes it's best to just go about your business and let folks believe whatever they want to believe. 
This is especially true if you can make a buck off of them and their advisers. 
Anyhoo, the thing about the spread is, although it is a bet on cheaper input costs (crude) it is also a bet on being able to maintain your higher price for the end product (gasoline).And now that's a problem....
Phillips 66 is the largest position in the CRAK at 8.17% of the portfolio, followed by Reliance and Valero, both at a hair above 7%. Here's how it has performed, via FinViz:

CRAK Market Vectors Oil Refiners ETF daily Stock Chart