Refined products range from LPG propane — the lightest — through gasoline, jet fuel, and diesel down to asphalt and fuel oil — the heaviest. Light products — primarily the transportation fuels and petrochemical feedstocks — are more valuable than heavy products, such as fuel oil and asphalt.
In the U. Both sides of the refining business — purchasing crude oil and selling refined products — involve commodity markets, where prices are volatile and beyond the control of any market participant.
Prices are subject to sudden, one-off changes, cyclical e. Except perhaps in the very near term, crude and product prices have proven unpredictable, despite the best efforts of forecasters and market analysts over decades.
Fluctuations in oil prices would not be of great concern to refiners as opposed to consumers! They are subject to different driving forces, stemming from crude oil supply, end-use demand, inventory, and logistics factors — all affected in turn by economic activity, government regulation, and geopolitics.
However, Phillips 66 PSX , with its diversified earnings model, has a lower beta of 1. Integrated companies have an upstream and downstream asset base, which partially shields their earnings from volatile business conditions. Revenues generally the amount received from finished products depending on the price at which the finished products sell multiplied by the volume of finished products. Less direct operating expenses like natural gas used for fuel, chemicals and catalysts, and utilities. Directionally, where the crack trades should also indicate how strong earnings should be and where refiner stocks should trade.
Marathon Petroleum publishes various factors, which make up the refining and marketing margin indicator, per month. The factors include a blended crack, sweet prompt differential, sour prompt differential, and market structure. Notably, earnings depend on various factors. There can be a significant difference in earnings. The refining segment is one of the most volatile segments in energy and the overall market.
Representative crack spreads can vary widely between locations. LLS traded at a premium to Cushing for many years. Refiners with access to West Texas crude had a profit advantage. When differentials between various crudes become wide enough, refineries might look for ways to access the cheaper crude. For example, Andeavor, now owned by Marathon Petroleum, announced a plan in mid to move 50, barrels per day of crude from the Bakken region in North Dakota to its refinery in Anacortes, Washington.
Bakken crude was trading significantly below seaborne West Coast bound crude. The differential between the two crudes had to be larger than the rail transportation cost for Andeavor to make the decision.
The prices of products like gasoline can vary from region to region. For example, West Coast gasoline prices tend to be more expensive than other regions. As a result, the average price of gasoline tends to be higher than in other areas of the country. The majority of crude oil in the United States is delivered and refined in the Gulf States where it is efficiently distributed via a network of pipelines. In contrast, the West Coast and Washington, in particular, remain isolated with minimal pipelines.
In addition, due to our geographical and social factors, the West Coast exceeds the national average for gasoline consumption. Around the time of the financial crisis, crack spreads collapsed. The demand for products like gasoline suffered due to the weak economy. A major reason for the change was the divergence between WTI and Brent crudes. They were still able to sell finished products at relatively higher prices, which broadly improved their earnings. WTI Cushing traded significantly below Brent crude for most of through mid The two crude benchmarks were nearly on par with each other.
The spread remained rangebound in and However, the spread started widening in Meanwhile, the movements helped many refiners earn handsomely from the spreads, which impacted refining stocks. The company can utilize its pipeline network to refine cheaper Permian oil, Canadian crude oil, and Bakken oil in its refineries.
The trend has been gaining traction due to growing production. With the increased demand, distillate crack spreads are usually highest from October to February. The value of distillate exhibits seasonality due to increased domestic consumption in the winter months.
Crude Oil Petroleum Products. What drives petroleum product prices: Prices and Crack Spreads Gasoline is the most widely used petroleum product in the United States. Gasoline spot prices in different regions of the world generally move together. Distillate spot prices in different regions of the world generally move together.
Gasoline contracts traded in futures markets use RBOB as the underlying commodity. Since , distillate contracts traded in futures markets use ULSD as the underlying commodity. The value of gasoline exhibits seasonality due to increased consumption and changes in specifications during the summer.
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