Last fall’s severe downdraft in the prices of crude oil and natural gas liquids (NGL) has hit the energy sector hard, with exploration and production companies and oil-field services outfits feeling the most pain.
Despite their strong balance sheets, integrated oil companies haven’t been immune to , with the Bloomberg Global Integrated Oils Index losing 20 percent of its value since June 30, 2014. Even the Alerian MLP Index, which tracks a basket of 50 prominent master limited partnerships, has dropped by almost 12 percent over this period.
US independent refiners have provided one of the few pockets of outperformance in the energy patch; the Energy & Income Advisor US Refiners Index has rallied by 18.5 percent—and that return omits any dividends paid over this period.
The industry has benefited in part from the lag between falling crude-oil prices and slower-moving prices for gasoline, diesel and other refined products.
Equally important, West Texas Intermediate and Light Louisiana Sweet crude oil trade at widening discount to Brent crude oil, a benchmark that reflects global supply and demand.
This favorable price differential means that well-positioned US refiners can purchase discounted feedstock and sell their refined products at the same price as their international counterparts—a huge advantage that has ratcheted up the pressure on European downstream operators. (See European Refiners Feel the Pressure.)
These tailwinds have driven a steady improvement in crack spreads—a measure of refining profitability—on the Gulf Coast and in the Midcontinent region. (See Refining Our Outlook.)
As my colleague Elliott Gue explained in Reading Oil’s Futures, an oil market in contango—where barrels for immediate delivery trade at a discount to futures contracts—encourages market participants to store volumes, swelling inventories and setting the stage for further downside in prices.
And although US exploration and production companies have announced plans to slash capital expenditures in 2015, most still contemplate growing production from year-ago levels. Rising output likewise suggests that West Texas Intermediate could experience further downside.
All these trends put US refineries in the catbird seat, with the enviable option to choose from a variety of discounted North American crude oils on the light and heavy ends of the spectrum.
What could bring the fun to an end?
The federal government rolling back the ban on exports of domestically produced crude oil would narrow the price differential between US and international prices to the cost of transportation.
Despite exploration and production companies clamoring for this change and the US Dept of Commerce allowing exports of minimally processed condensate, the refining industry represents one of the few bright spots in the energy patch right now.
Elliott and Roger on Mar. 25, 2021
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