With oil ranking as one of this year’s best-performing commodities, the energy equities are participating in that rally and that includes refiners. The VanEck Vectors Oil Refiners ETF (NYSEArca: CRAK), the only ETF dedicated to refiners, is up more than 11% year-to-date.
CRAK tracks the MVIS Global Oil Refiners Index, “which is a rules-based, modified capitalization weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining which may include: gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to VanEck.
Some analysts believe much of the good news pertaining to refiners is already priced into the group.
“Despite normalization of operations, the strong margins and wide crude spreads have persisted, creating a very favorable environment for refiners,” said Morningstar in a note out Wednesday. “Although elevated gasoline inventories present a risk, distillate inventories are near five-year lows, while demand for both is strong and the economy is healthy, suggesting total margin strength will continue. Meanwhile, pipeline constraints don’t appear likely to be alleviated until late 2019, likely extending wide crude spreads for another year.”
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Stabilizing crude oil prices and potential production increases from U.S. shale producers could also bolster the case for North American refiners. The U.S. refining sub-sector has been one of the most profitable sectors in the U.S. economy over the past five years.
A combination of diminished global output and rising global demand have helped reduce the global supply glut that dragged on oil prices for years. Production cuts from the Organization of Petroleum Exporting Countries and their allies have largely contributed to the cut in supply. Meanwhile, expanding economies around the world has bolstered demand for raw materials such as crude oil.
Gasoline margins are a source of concern for refiners because export growth is not keeping pace increased output.
“Although already at their lowest in four years, gasoline margins remain at risk, however. Thanks to strength in distillate margins and wide crude spreads, refiners’ total margin has remained attractive, encouraging high utilization rates; combined with capacity increases, this has resulted in record levels of production,” according to Morningstar.
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As Morningstar notes, refiners have been boosting buybacks and dividends in recent years, trends that are expected to continue going forward.
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