He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. If the prices rise, they book a loss on the paper trades while realising a profit on the physical sale and vice versa in case the prices fall. Gulf Coast crack spread, based on published spot prices for the relevant crude and products. . For Taylor Muckerman, I am Sean O'Reilly. The chart below shows the refining margins for various regions as well as the worldwide refining margin for Phillips 66 during the 1Q15—3Q16 period.
Typically, refiners purchase crude oil for processing in a particular month and sell the refined products one month later. Gaining cognizance of the procedural nuances that refineries regularly face leads to a better understanding of the crude oil and refined product industry. I know that many of you have more strenuous. Despite ever-changing government-mandated specifications, market demand, and encompassing production constraints, refineries have the end goal of producing salable products that optimize financial performance. Together with other indicators, such as crude oil inventories and refinery utilization rates, shifts in crack spreads or refining margins can help investors get a better sense of where some companies, and the oil market, may be headed in the near te Did you know: There are several ways to manage the price risk associated with operating a refinery. Yesterday, 8point3 Energy Partners, which literally owns and buys solar installation projects, they have 20- to 25-year lives and then sell the electricity to utility companies, and that's it. Selling the crack spread means you expect that the demand for refined products is weakening or the spread itself is tightening due to changes in oil pricing, so you sell the refined product futures and buy crude futures.
A crack spread measures the difference between the purchase price of crude oil and the selling price of finished products, such as gasoline and distillate fuel, that a refinery produces from the crude oil. Within a region, there can also be seasonal differences in demand for heating fuel versus transportation fuel. Muckerman: You become more profitable if you can sustain low oil prices, and then you can push out lowering gasoline prices. Muckerman: Yeah, they were predominantly shallow-water, jackup rigs. The construction of refineries depends on the type of crude inputs, also referred to as the crude slate, available in each region, as well as the demand-driven quality and specifications of refined products desired in each geographic marketplace. Thus it is just an indicator of refinery profitability. For example, a crude oil refiner believes that gasoline prices will remain strong over the next two months and wishes to lock in the margins now.
When refiners look to hedge their crack spread risk, they are typically naturally long the crack spread as they continuously buy crude oil and sell refined products. But now, Transocean has been selling rigs to the tune of billions of dollars lately as well. Thanks to various macro forces, it is now rock solid Dem and insanity is taking over. Over the years, he has built an investing skill set to rely on when evaluating companies inside and out. Multiple variables influence refining operations, with price implications of fuels that move consumer goods to market constantly subject to change based on refinery performance and key market fundamentals. To protect their margins and profitability, local refiners hedge themselves by selling crack spreads forward to banks and trading outfits of major oil companies operating out of Singapore, Hong Kong, Dubai, Tokyo and Sydney. One type of crack spread contract bundles the purchase of three crude oil futures 30,000 barrels with the sale a month later of two unleaded gasoline futures 20,000 barrels and one heating oil future 10,000 barrels.
Given a target optimal product mix, an independent oil refiner can attempt to hedge itself against adverse price movements by buying oil and selling futures for its primary refined products according to the proportions of its optimal mix. Muckerman: It's getting down into the nitty-gritty. Muckerman: Yeah, it's no joke. Revenue per employee should be all right. The complexity factor is independent of the throughput of a refinery, but multiple units of the same process increase complexity.
But if the European Union credit crisis worsens, it could act as a dampener, a refinery official said. O'Reilly: 8point3 was created when that was hot. But then again, it wasn't as expensive as deepwater, so you would expect, maybe there's some leeway there. Because the 3:2:1 crack spread is a product of the interplay of three commodity prices, each subject to different but interconnected supply and demand balances, the range of values can vary widely. These are known as 3:2:1 crack spreads and even 5:3:2 crack spreads, and they can also be used as a form of hedging for an investment in refiners themselves.
This decline in price has attracted the attention of traders, investment analysts, and market commentators alike, all with an opinion on where potential opportunities in the energy sector exist. Refining Margin Calculations The refiners margin calculation requires two concepts to be understood: Crude Oil Landed Cost and Product Netback Value. 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. 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. With the regarding sulfur requirements for marine vessels at the forefront of many fuel procurement decisions, crack spreads and the encompassing prices of refined fuels will be impacted.
Listen: in the petroleum industry, refinery execs are worried about hedging the difference between their input and output prices. Classifications of refineries allude to the quality of refined products they produce and are later influential in assignment of a refinery complexity score, based on the Nelson Complexity Index, on a scale of 1-15 least to most complex. Be careful here: restrictions will often tighten the product supply due to increased specifications. They're making deals, it's fine, they were fulfilling on why they were created. Thus, if the sum of the refined value exceeds the crude value, your crack spread is positive quoted in dollars per barrel. Similarly, a 6:3:2:1 crack spread denotes the spread between the cost of buying 6 barrels of crude oil and the revenues from selling 3 barrels of gasoline, 2 barrels of diesel fuel, and 1 barrel of fuel oil or kerosene.
O'Reilly: That is it for us, folks. Muckerman: Yeah, he's the truth when you're looking at solar. Interested in learning more about the fundamentals of the crude oil industry that lead into refining operations? If a crack spread is a positive number then the price of the refined products is higher than that of crude oil, the raw material, and the spread is profitable. Muckerman: You would imagine so, because you never know when prices are going to rise. Conversely, if the refined product value is less than that of crude oil, then the gross cracking margin is negative. The crack spread X:Y:Z reflects the spread obtained by trading oil, gasoline and distillate according to this ratio. If you're at a hedge fund, you'll use a crack spread to hedge against a firm's share value; if you're an energy trader, it will simply be another aspect of your portfolio.