Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Refiners Are Still Making Money Even as Oil Rebounds
Transcript
- Lucas: Oil has bounced. WTI crude closed at $91.18 yesterday, up about two and a half percent over the past five days. That's a real reversal from the slide we've been tracking all May. Luna: And that usually means bad news for refiners — they buy crude as their raw material. So when crude goes up, their margins get squeezed, right? Lucas: That's the textbook story. But the data says something else. Look at the refiners — Valero, Marathon Petroleum, Phillips 66. Their stocks have actually held up better than the broader energy sector over this crude bounce. And the crack spread — that's the difference between what they pay for crude and what they get for gasoline and diesel — is still north of $30 a barrel. Luna: Thirty dollars? That's a fat margin by historical standards. I remember the ten-year average is something like $15 to $20. Lucas: Exactly. So the question is: why aren't refiners getting crushed? And the answer has a few layers. First, gasoline prices haven't fallen nearly as fast as crude did. Regular gas is still $4.47 a gallon, down from $4.49 a few days ago. That's basically flat. Meanwhile WTI fell from $98 to around $88 in late May, and now it's bounced to $91. So the crack spread compressed a bit, but it's still historically wide. Luna: So the retail price of gas is sticky on the way down. That's a well-known phenomenon — 'rockets and feathers' they call it. Prices shoot up like a rocket but fall like a feather. Lucas: Right. But there's another factor that's less talked about, and it's about the futures market structure. When crude was falling, the market was in contango — that means futures prices were higher than spot prices. Refiners who buy physical crude and hedge in the futures market actually benefit from that. They can lock in cheaper crude today and sell their products at later-dated prices that are higher. Luna: So the roll yield works in their favor when the market is in contango. That's a subtle point — most investors don't think about it. Lucas: And it's not just theory. Look at the data. The EIA's weekly status report shows refinery utilization is at 94 percent — that's near capacity. Demand for gasoline is still strong heading into summer driving season. So refiners are running flat out, selling every gallon they can make, and the margin per gallon is still fat. Even with crude up $3, the math still works. Luna: But if crude keeps rising — say WTI goes to $95 or $100 — at some point the crack spread has to narrow, doesn't it? Lucas: It will, eventually. But the speed matters. Refiners typically hedge months in advance. So even if spot crude jumps, they've already locked in their crude supply at lower prices for the next month or two. That buffers the immediate impact. Luna: So for an investor, the refiner story isn't just about the price of oil today. It's about the whole structure of the market — the shape of the futures curve, the utilization rates, the hedging books. Lucas: And that's why we're doing an episode on this. Because the conventional wisdom — 'oil up means refiners down' — is too simple. Right now, the refiners are in a sweet spot: crude is cheap enough that their input costs are reasonable, but product demand is strong enough that output prices stay high. And the market structure adds a tailwind. Luna: So if someone is holding shares of Valero or Marathon Petroleum, should they be worried about this crude bounce, or is it just noise? Lucas: I'd say it's more noise than signal, at least for now. The real risk would be a demand shock — if the economy slows and gasoline consumption drops. But we haven't seen that yet. The EIA's latest data showed product supplied — a proxy for demand — was actually up week over week. Luna: And that's despite inflation still running hot. CPI came in at 332.4 for April, up from 330.3. Core PCE is also up. So consumers are still spending on fuel even as prices remain elevated. Lucas: Which brings us back to the refiner profit machine. When oil was crashing in May, we did an episode on why refiners were making bank. Now oil is bouncing, and the story is more nuanced — but the machine is still running. Luna: It's almost like the refiner business model has a natural hedge built in. When crude falls, their margins blow out. When crude rises, they can pass through costs to consumers because demand is inelastic. And the futures market gives them an extra layer of protection. Lucas: That's the key insight. And it's why refining has historically been one of the most profitable segments of the energy industry over a full cycle — provided you have the right assets and the right risk management. Luna: Speaking of the cycle — we're in a mid-cycle environment right now, aren't we? Oil prices around $90, not too hot, not too cold. Refiners are cashing in. But what about the long-term outlook? With EVs growing and renewable mandates, doesn't that threaten gasoline demand eventually? Lucas: It does, but that's a gradual trend. The IEA expects global oil demand to plateau around 2030. But in the meantime, the existing fleet of gasoline cars is huge, and the turnover is slow. So for the next few years, refiners have a pretty clear runway. Luna: And that's the kind of analysis we try to bring to every episode — not just what's happening today, but why it's happening and what it means for the future. Lucas: If walking through the economy with us has made something click — maybe cracked open a concept you'd heard before but never fully understood — that's what we're here for. This show is ad-free and listener-supported, and that's only possible because of people who find value in it and decide to chip in. Luna: Yeah, it's a small thing that makes a big difference. If you've ever thought about supporting the show, the easiest way is at buy me a coffee dot com slash fexingo. No pressure, just an option if the show has been useful to you. Lucas: So back to the data — the other thing that stands out in the EIA report is that distillate inventories are still well below the five-year average. That's heating oil and diesel. And that's another support for refiner margins, because it means they can get a premium for those products too. Luna: So it's not just gasoline. The whole barrel is profitable. And that makes the refiner thesis even stronger. Lucas: Exactly. So when you look at a stock like Phillips 66 or Marathon Petroleum trading at six or seven times earnings with a dividend yield around 3 percent, the valuation doesn't fully reflect this earnings power. The market is pricing in a margin collapse that hasn't happened yet. Luna: So there's a potential value play there, if you believe margins will stay elevated for a while. But investors need to watch the macro — if we get a recession, that could change the demand picture quickly. Lucas: And that's the balance. The bull case is that the economy is resilient — we're not seeing jobless claims spike, and consumer spending is still positive. The bear case is that inflation is sticky, the Fed has to keep rates higher for longer, and eventually that will bite. Luna: But for now, the data points to a refiner-friendly environment. Crude at $91, gasoline at $4.47, crack spreads at $30, utilization at 94 percent. That's a pretty good setup. Lucas: It is. And if WTI drifts back toward $95 or $100, we'll revisit the thesis. But for now, the refiner profit machine is still humming. Luna: Alright, Lucas. Thanks for breaking that down. Next time we'll look at what the oil rebound means for the broader energy sector and whether the XLE can catch a bid.