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Why the crack spread signals the Refining segment’s performance

Alex Chamberlin

Must-know: An overview of Phillips 66 and its latest earnings (Part 11 of 20)

(Continued from Part 10)

Crack spread shows the Refining segment’s performance

The spread between West Texas Intermediate (and WTI) and Brent crude represents the difference between the two crude benchmarks. WTI represents the that price oil producers receive in the U.S. Brent represents the prices that oil producers receive internationally.

The significance of the crack spread on refining margin

The crack spread measures the difference between market prices for refined petroleum products and crude oil. In the U.S., the 3:2:1 crack spread is followed. The spread indicates three barrels of crude oil producing two barrels of gasoline and one barrel of diesel. A higher industry average crack spread indicates higher profitability for the refiners like Phillips 66 (PSX).

Crack spread in 2013 and 2012

From 2012 to 2013, the average crack spread narrowed. It narrowed because of the decline in gasoline and distillates prices compared to crude prices. Lower demand for refined products led to lower prices in 2013. So, the segment’s performance deteriorated. This resulted in a 3.5% net income margin—compared to 5.6% in 2012. To learn more about the crack spread, click here.

Crack spread in 2014

In 2Q14, Phillips 66′s refining segment’s net margin dropped more than 14%.  The lower refining margins were a result of decreased market crack spreads. The crack spreads were partially offset by widening crude differentials.

The crack spread also affects other major U.S. refiners like as Valero Energy (VLO), HollyFrontier (HFC), and Marathon Petroleum (MPC). These companies are components of the Energy Sector Select SPDR ETF (XLE).

Continue to Part 12

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