Reading into the Performance of Refining Stocks So Far in 2016
Cracking the Spread: Refining Margin Trends in 1Q16
Rising refining stocks until the end of November
In 2015 through the end of November 2015, the stocks of refining companies witnessed an upward spiral. This was on the back of better refining margins and earnings. Tesoro and Valero rose by 53% and 43%, respectively. Marathon Petroleum (MPC) and Phillips 66 (PSX) rose by 27% each during the same period.
During the same period, USGC WTI Cushing 3-21-1 crack rose by 68%. Refining stocks show a positive correlation to cracks. On testing the correlation between the MPC and USGC WTI Cushing 321 crack, the correlation coefficient stands at 0.55, indicating a strong positive correlation. This indicates that the ~55% movement in MPC’s stock price can be explained by changes in the WTI Cushing 321 crack.
The fall in refining sector stocks
However, refining stocks starting falling in December 2015 on the news the crude oil export ban in the US, which raised fears of a fall in the refining margins of US refineries. The swelling inventory levels of refined products coupled with narrowing cracks put further pressure on refining stocks, so that from December 1, 2015, to February 11, 2016, MPC fell by 48%. Tesoro (TSO) also fell by 39% while Valero Energy (VLO) and Phillips 66 (PSX) declined by 23% and 21%, respectively.
Recent strength in refining stocks
That being said, from the end of February to date (as of March 11), cracks have started strengthening, and refining margin indicators have also started to show improvements. This is most likely why refining stocks have been strengthening. From the end of February to date, TSO rose by 20%, MPC by 18%, and PSX by 17%. VLO increased by 15% during the same period. For exposure to refining sector stocks, you might consider the Vanguard Energy ETF (VDE), which has ~10% exposure to the sector. VDE has PSX, MPC, VLO, and TSO in its portfolio.
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