Elevated Refinery Margin Suggests Additional Oil Upside
Refinery margin explained:
The refinery margin is the percentage of profit generated from the sale of refined crude products. A 3:2:1 refinery spread margin percentage is charted here. A 3:2:1 refinery spread approximates the profit generated from a barrel of oil by subtracting the cost of 3 barrels of crude oil from the revenue generated via the sale of 2 barrels of gasoline and 1 barrel of heating oil.
When the profit is divided by the total revenue, as this chart does via the formula below, then a percentage of profit is calculated, ie. a refinery margin.
Side notes: Heating oil contracts are traded as diesel fuel hedges because heating oil and diesel are distilled from similar temperature ranges, with heating oil being slightly heavier. The abbreviation for barrel = bbl
Refinery margin = profit/revenue = (2bbl gasoline + 1bbl diesel - 3bbl crude)/(2bbl gasoline + 1bbl diesel) = (84*RB1! + 42*HO1! - 3CL1!)/((84*RB1! + 42*HO1!)
There are 42 gallons in a barrel so RB and HO which are priced in gallons need to be multiplied by 42 to convert to barrels so as to have the same units as CL which is priced in barrels. The formula as entered into tradingview is divided by 3 to factor out the unnecessary 3. This step isn’t necessary and leaving it as written above will yield the same result, it’s just cleaner without the 3.
Chart explained:
The refinery margin going back to 1985 is plotted as a blue line for the purpose of identifying trends which tend to occur when it reaches the level of .328 i.e. 32.8% profit margin. The occurrences of that margin level are indicated with red vertical lines and there are arrows on the CL chart plotted below showing if the crude oil price reacted by going up using green arrows or if it reacted by going down using red arrows. There is a yellow arrow at the end because the future reaction to the currently-elevated margin is yet to be determined. RB1! and HO1! are shown below CL for reference. At this level of profit margin, crude tends to outperform gasoline and heating oil which causes the refinery margin to go down. This outperformance tends to come in the form of crude oil going up quicker than its products. Outperformance can also come in the form of oil not dropping as quickly as products or staying flat while products drop. Historically, oil has risen to bring the margin down, but also historically, RB and HO have not reached these levels and CL has not gone much higher than this, so this analysis is applying historical norms to historical aberrations. It suggests going long crude oil but that’s just my take on it.
The refinery margin is the percentage of profit generated from the sale of refined crude products. A 3:2:1 refinery spread margin percentage is charted here. A 3:2:1 refinery spread approximates the profit generated from a barrel of oil by subtracting the cost of 3 barrels of crude oil from the revenue generated via the sale of 2 barrels of gasoline and 1 barrel of heating oil.
When the profit is divided by the total revenue, as this chart does via the formula below, then a percentage of profit is calculated, ie. a refinery margin.
Side notes: Heating oil contracts are traded as diesel fuel hedges because heating oil and diesel are distilled from similar temperature ranges, with heating oil being slightly heavier. The abbreviation for barrel = bbl
Refinery margin = profit/revenue = (2bbl gasoline + 1bbl diesel - 3bbl crude)/(2bbl gasoline + 1bbl diesel) = (84*RB1! + 42*HO1! - 3CL1!)/((84*RB1! + 42*HO1!)
There are 42 gallons in a barrel so RB and HO which are priced in gallons need to be multiplied by 42 to convert to barrels so as to have the same units as CL which is priced in barrels. The formula as entered into tradingview is divided by 3 to factor out the unnecessary 3. This step isn’t necessary and leaving it as written above will yield the same result, it’s just cleaner without the 3.
Chart explained:
The refinery margin going back to 1985 is plotted as a blue line for the purpose of identifying trends which tend to occur when it reaches the level of .328 i.e. 32.8% profit margin. The occurrences of that margin level are indicated with red vertical lines and there are arrows on the CL chart plotted below showing if the crude oil price reacted by going up using green arrows or if it reacted by going down using red arrows. There is a yellow arrow at the end because the future reaction to the currently-elevated margin is yet to be determined. RB1! and HO1! are shown below CL for reference. At this level of profit margin, crude tends to outperform gasoline and heating oil which causes the refinery margin to go down. This outperformance tends to come in the form of crude oil going up quicker than its products. Outperformance can also come in the form of oil not dropping as quickly as products or staying flat while products drop. Historically, oil has risen to bring the margin down, but also historically, RB and HO have not reached these levels and CL has not gone much higher than this, so this analysis is applying historical norms to historical aberrations. It suggests going long crude oil but that’s just my take on it.