Energy Downturn Finally Bites Refiners

For 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.

However, that trend is reversing this year as highlighted by a 10.1 percent decline for the Market Vectors Oil Refiners ETF (NYSE:CRAK), a performance that is nearly 600 basis points worse than the broader Energy Select Sector SPDR (NYSE:XLE). To be fair, it cannot be ignored that since CRAK debuted in August, the ETF has outperformed XLE by 400 basis points.

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.

Crack spreads are increasingly coming under pressure as the laws of supply and demand come into balance. Highly profitable crack spreads are drawing more refining capacity online and leading to more supply for many derivative oil products. Established refiners are struggling to combat already high inventories of gasoline and other products by cutting production at key plants, but that effort is unlikely to help sustain cracking margins over the short term, according to OilPrice.com.

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.

Phillips 66 (NYSE:PSX), a stock that Warren Buffett's Berkshire Hathaway (NYSE:BRK-B) has recently been gobbling up shares of, is CRAK's second-largest holding at a weight of 7.7 percent. In fact, Berkshire Hathaway is now the largest non-mutual fund owner of Phillips 66. Valero Energy Corp. (NYSE:VLO) is CRAK's largest holding at a weight of just over 8 percent.

Refiners have not been spending on big acquisitions and do not face some of the credit issues smaller exploration and production firms are dealing, two traits that bode well for CRAK and its constituents over the long-term.

Energy analysts are forecasting that cracking spreads will fall substantially and margins in certain areas of the country such as the Midwest are already under severe pressure or are even negative thanks to limited storage capacity for final delivery products, adds OilPrice.com.