Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Refining Is Profitable When Oil Crashes
Transcript
- Lucas: Oil is in freefall. WTI crude touched $89.88 a barrel this morning, down more than six percent in a week. But walk into any gas station and you wouldn't know it. Luna: Regular gasoline is still $4.47 a gallon nationally. Dropped two cents from last week. Hardly the kind of relief you'd expect from a crude crash. Lucas: Right. So there's a disconnect, and it's creating a weird pocket of profitability. While producers like Exxon and Chevron are getting hammered — XOM down six point two percent in five days, CVX down four point seven — refiners are actually printing money. Luna: And that's because of the crack spread, right? The difference between what they pay for crude and what they sell gasoline and diesel for. Lucas: Exactly. When crude drops fast but gasoline prices stay sticky, that spread widens. And right now it's at some of the widest levels we've seen in years. Refiners buy cheap oil, sell expensive fuel, pocket the difference. Lucas: Look at the stocks. The broader energy sector — XLE — is down five point four percent. But refiners are holding up. Valero, Marathon Petroleum, Phillips 66 — they're either flat or positive over the same period. The market is pricing in this margin expansion. Luna: So why aren't gasoline prices falling faster? If crude is $89, shouldn't the pump price follow? Lucas: In theory, yes. But there are two big things at play. First, refining capacity in the US is still constrained. We lost something like a million barrels a day of capacity when a bunch of refineries closed during the pandemic, and not all of it has come back. So there's a bottleneck. Luna: Basic supply and demand. Fewer refineries means less gasoline, so prices stay higher even if crude is cheap. Lucas: Right. And second, we're heading into summer driving season. Demand for gasoline is about to peak. So refiners are running their plants as hard as they can, but they're already near capacity. Any little disruption — a planned maintenance outage, a hurricane threat — can send gasoline prices up or keep them elevated. Lucas: The thing is, this isn't a mystery. The data is clear. The crack spread for gasoline — the difference between crude and gasoline futures — has jumped over thirty percent in the last two weeks. That's pure margin expansion for refiners. Luna: And it's a nice reminder that not all energy stocks move together. If you're an investor, you really have to look at the sub-sectors. Lucas: Yeah, you know, a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. It keeps us independent, no ads. If walking through the economy with us has made something click, that's the place. Luna: It really does. And it keeps us free to dig into these specific corners without worrying about sponsors. Lucas: So back to the crack spread. One way to think about it is like a toll booth. The refiner sits between the cheap crude and the expensive gasoline. They don't care if oil goes up or down as long as the gap is wide. Luna: Right, but that gap can disappear fast. If crude jumps or gasoline drops suddenly, margins get squeezed. Lucas: Exactly. That's the risk. Right now it's wide, but it's not guaranteed to stay that way. In fact, historically, when crude falls this fast, gasoline catches up eventually. It just takes time. Luna: How much time are we talking? Lucas: Usually a few weeks. Gasoline prices lag crude because of the time it takes to refine, store, and distribute. So the pump price might drop another dime or two by mid-June. But don't expect it to fall fifty cents. Luna: And that's partly because the refiners are in no rush to lower prices when they have pricing power. Lucas: Exactly. They're rational actors. If they can sell gasoline at $4.47 while buying crude at $89, they'll take that margin. And there's no antitrust issue because it's just the market clearing. Luna: But the consumer feels it. Even with oil dropping, the average household is still paying more for gas than they were two years ago. Lucas: And that feeds into the inflation story. The April CPI came in at 332.4, up from 330.29 the month before. Core CPI is also rising. So energy isn't the only thing keeping inflation sticky, but it's definitely a factor. Luna: The breakeven inflation rate on ten-year Treasuries has actually ticked down to 2.38 percent. So the bond market thinks inflation will ease. But gas at $4.47 doesn't feel like easing. Lucas: Right, and that's the tension. The bond market is forward-looking. It sees crude falling and expects gasoline to follow. But in the real world, the pass-through is slow. And the refiners are laughing all the way to the bank. Luna: So if someone wanted to play this trade, what would they buy? Lucas: Well, the pure-play refiners are Valero, Marathon Petroleum, Phillips 66. They're the ones most leveraged to the crack spread. There's also an ETF — the VanEck Oil Refiners ETF, ticker CRAK — but it's not very liquid. Luna: And what about the downside? If we get a recession and gasoline demand drops, those margins evaporate. Lucas: That's the big risk. Refining is a cyclical business. Right now we're in a sweet spot — tight supply, strong demand, cheap crude. But if the economy slows and people drive less, or if more refining capacity comes online, the margin compresses. Luna: And there's always the possibility that OPEC+ does something to boost crude prices. That would narrow the spread too. Lucas: Exactly. So it's not a set-and-forget trade. It's a tactical move. But for the moment, the data is clear: refiners are outperforming the broader energy sector by a wide margin. Luna: And that's a useful lesson for investors. Even within one industry, you can have winners and losers depending on where you sit in the value chain. Lucas: Right. Producers lose when oil falls. Refiners can win. It's all about the spread.