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Over the past year, we have been hearing a lot of news about soaring crude oil prices. The easiest thing that we could think about is investing our money into independent oil refiners. Companies such as Frontier Oil (NYSE: FTO), Valero Energy (NYSE: VLO), Tesoro (NYSE: TSO), Alon USA Energy (NYSE: ALJ) or Western Refining (NYSE: WNR) are among those potential stocks on the waiting list.Though it may seem surprising, Kiplinger.com advises us of exactly the opposite. Kiplinger underlines the fact that refiners represent a way to loose a lot of money... contrary to pipelines, oil producers and energy service companies. This came as the result of people's needs to transform crude oil into gasoline, diesel, jet fuel or heating oil.
The big difference between the cost of crude and the price of refined products is called the "crack spread", and this is where the problem comes in. In May of last year, the crack spread peaked at $27, and even moved up as high as $40 in some locations. This compares to the historical norm of closer to $20. But starting with the spring of 2007, things started changing, and the spread began to narrow... now the spread has fallen down to around $8.50 for some companies.
The main reason that refiners are not as profitable as we might expect is that they have to spend a lot of money to buy or build capacity, while facing steep maintenance costs and big debt loads. In addition, the article shows us that that even the big oil companies don't take into account the possibility to buy the independent refiners.
Even when crack spreads were wider than today, executives from Big Oil stated that building refineries becomes an useless action because of their weak returns, which gives you an indication of just how tough things must be right now.
We may see a nice rebound in the coming months for refining stocks but for now the article advice us to stay away from oil and gas companies that could scatter our money. According to Kiplinger, the trend is going to turn, and we should see the crack spread start to widen, and when that starts to happen, Kiplinger advises us that there will be plenty of time to jump in and make some money... but for now, just stay away for a while longer.
Eliza Popescu is a financial writer for the online investment advisory service Investor's Observer.
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Reader Comments (Page 1 of 1)
5-16-2008 @ 6:30PM
Kenneth said...
Crack spread is a good name for it considering the profit margin.
5-16-2008 @ 10:14PM
Martin said...
"And the Academy Award goes to George Bush" The sequel of "Ask Saudi for a Break" he has Americans fooled that Bush really want the Saudis to assist us by producing more barrells of oil. Bush's Dad, Cheney and Bush Jr. have invested interest in these high prices.
Bush is really going to bat for Americans??? Yeah Right!!
Even if they produce more oil, will they drop the price per barrell??? I DON"T THINK SO! Demand will still dictate price and the Speculators will dictate price.
As the Exxon CEO stated in his interview as long as deman world wide remains constant, so will these high gas prices.
Let's find alternative fuels, increase Gas Mileage in our new vehicles and quickly!!!