If the conventional wisdom is that refiners equities are usually less bad than other energy stocks when oil prices decline, then it can be argued the nearly 4 percent year-to-date being sported by the Market Vectors Oil Refiners ETF (CRAK) is fairly impressive.
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The gains posted by some refining stocks, including several of the 26 held by CRAK, are enough to make investors ponder if the ETF and its holdings can remain firm going forward. CRAK tracks the Market Vectors Global Oil Refiners Index (MVCRAKTR), a modified market cap-weighted index intended to track the performance of the largest and most liquid companies in the global oil refining segment, according to Market Vectors.
While CRAK has been solid this year, refiners equities do face some headwinds, particularly as distillate supplies remain elevated following a mostly moderate winter.
CRAK, Refiners Equities And Distillate Suppliers
Lack of winter heating oil demand has pushed distillate inventories above 160 million barrels (bbl) as of early April versus historical averages of less than 130 million bbl, according to recent EIA data. With little incentive to produce additional distillates, some US refiners switched over early to gasoline, leading to an unseasonable build in gasoline inventories. As a result, gasoline stocks were moderately overbuilt but have since seen supportive draws. As of early April, they stood at 244 million bbl but were a more moderate 24.3 days of implied inventory when scaled against underlying demand, said Fitch Ratings in a new note.
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Refiners benefit when oil prices slide due to lower crack spreads, perhaps the inspiration for CRAK's ticker, and that could be a catalyst for further upside for the ETF even if oil prices continue climbing.
Crack spreads contracted notably from last year's strong levels. Benchmark Gulf Coast 321 crack spreads in first-quarter 2016 were about 40 percent below year-ago levels, averaging $9.16/bbl versus $15.37 in 2015. Midcontinent crack spreads were down a comparable level, while NYH 321 spreads fell a more moderate 21 percent, having experienced less of a run-up in prior years. Key crude spreads have dropped sharply lower in line with lower oil prices, removing a windfall for midcontinent and other location- advantaged refiners, added Fitch.
Phillips 66 (PSX) and Valero Energy Corporation (VLO) combine for over 15 percent of CRAK's weight and are the ETF's top two holdings. The former is up more than 7 percent this year, while Valero is off 10.7 percent.
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