The conventional wisdom that rising oil prices often pinch refining equities is holding true this year as the VanEck Vectors Oil Refiners ETF (CRAK) is off nearly 5.6 percent. That compares with a year-to-date gain of 11.4 percent for the Energy Select Sector SPDR (ETF) (XLE), the largest equity-based energy exchange-traded fund.
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Refiners And The Energy Downturn
For a good part of the energy sector's downturn, refiners were widely heralded as the sector's lone bright spot. As major integrated oil names, exploration and production equities and oil services stocks plunged, refiners looked good by comparison.
With crack spreads a refiner's profit from turning crude into a finished, usable product coming under pressure, CRAK and its constituents are finally being pinched more so than some other energy industries.
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Rising oil prices are stoking short interest in some of CRAK's holdings while bearish traders depart other segments of the energy patch.
Average short interest across global oil and gas stocks has continued to decline, with short sellers covering a fifth of positions on average. While shorting levels are relatively lower at refiners, a marked increase in levels has been seen as the benefit of declining prices reverse, said Markit in a new research note.
Markit data indicate that over the past year, the percentage of shares of Western Refining, Inc. (WNR) on loan to short sellers has doubled to 49 percent. Western Refining is CRAK's third-smallest holding at a weight of less than 1.5 percent.
Alright, so elevated short interest in a stock not a major factor in CRAK is not a big deal. Applying that logic, it is notable that short interest in Phillips 66 (PSX), CRAK's largest holding at a weight of nearly 7.7 percent, remains elevated.
Absolute short interest is relatively low at the Phillips 66 at 2.3 percent however; this represents $835 million in aggregate short positions, twice the level seen six months ago, said Markit. While refiners may be struggling as their margins suffer, the most shorted companies remain the drillers.
Year-to-date, the amount of refining shares on loan to short sellers is up 14 percent, the second-largest increase among six energy sub-groups, according to Markit data. Only integrated oil producers have a larger percentage of shares on loan to shorts at 42 percent.
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