247Bull.com Editor: The crack spread is simply the difference between the price paid for crude oil, and the price of the refined products produced by the refiner. If a crack spread is a positive number then the spread is profitable, however if the refined products (gasoline, diesel fuel etc.) are priced at less than the cost of crude then the spread is not profitable. Right now the spread is very large which is generating a lot of profit for US refiners.
US refining stocks rose more than 70% over the past six months in absolute terms and 45% relative to the market, but the rally is not yet over.
According to our Commodity & Energy Strategy service, the rally in US refinery stocks has further to run. One of the reasons is that distillate crack spreads are extremely wide versus WTI and LLS benchmarks, indicating genuine scarcity of this product. Distillate inventories are at four-year lows and the global growth recovery will likely lead to further distillate shortages.
In addition, the Brent/WTI spread will stay wide. Cushing inventories rose by 3 million barrels over the last month, despite the ongoing increase in petroleum railroad transportation.
This highlights that transportation bottlenecks are worsening and hefty WTI discounts versus Brent are likely to persist. Finally, valuations are still attractive and profits will continue to expand.
The bottom line
Maintain a long position in US refinery stocks.
Article courtesy of http://bcaresearch.com