Wednesday, July 12, 2017

Refinery Stocks: Crack Spread Error!

On June 21, I posted about the end of the rally for refinery stocks. The post coincided with the tail end drop in the two listed refinery stocks, PetronM & Hengyuan. Subsequently, both stocks recovered.

Chart 1: PetronM & Hengyuan's daily chart as at July 12, 2017 (Source:

For the next 2 weeks, I went back & checked on the chart for RBOB Gasoline Crack Spread Futures, Continuous Contract #1 at (here) and I was perplexed by the recovery in our refinery stocks while the crack spread was still hooking down. After closer examination, I discovered that the chart on was not updated. I was misled by the refreshed date (denoted as A) and data time period (denoted as B). In actual fact, the data points on the chart stopped somewhere in early March (look closely at the box denoted as C).

Screenshot of chart from

That mistake prompted me to search for a new source of chart for crack spread. I found it at (here) for the crack spread futures traded on NYMEX. The current weekly chart is given here. If you look at the chart below, you can see clearly that the crack spread futures recovered substantially in the past 3 weeks. That accounts for the recovery in the share prices of PetronM & Hengyuan.

Chart 2: Crack spread futures as at Jul 9, 2017 (Source: CMEGroup)

When I put the charts for crack spread futures and WTIC next to each other, I discovered the close correlation between crude oil prices and crack spread futures. How do refinery companies make abnormal profit?

Chart 3: WTIC & Crack spread futures as at Jul 9, 2017 (Source: & CMEGroup)

I found this comment in Quora to explain the outsize profit for refinery stocks:
Fuel prices tend to rise immediately upon news of higher oil prices, but refineries have often hedged against oil price rises and carry significant inventory.  During periods of rising prices, you can see modest increases in refinery profitability due to more valuable inventory and the positive effects of hedges made during low price periods.
The truly good times for refineries come when prices fall.  Margins explode because fuel prices will fall much more slowly than crude prices, and refineries delay their product price falls as much as possible in order to maximize profits.  This is common on the retail side of fuels as well, where a period of falling prices is often the only time retail fuel stations make better than break even on fuel.
Now we know better. So, the next time crude oil prices drop, you should consider buying refinery stocks.

1 comment:

eric said...

Thanks sifu alex. Hope to see u again at bursa venue