Refining Rewards And Risks For Four Oil Majors

On the basis of the long-term expected rewards, we like double-weighted buy recommendations with downstream exposure, ConocoPhillips (COP), Chevron (CVX) and Lukoil (LUKOY.PK). To hedge the short-term risks we changed our rating to hold for downstream concentrated Marathon Oil (MRO), from a half-weighted buy recommendation.

The long-term crack spread, or margin between the price of refined products and crude oil, is probably higher than the $10 a barrel (17% of crude oil price) we have in present value estimates, but the recent sharp runup to the current quote of $17 a barrel (25% of crude oil price) for the next twelve months may not be sustainable yet.

Taking perspective from a new graph, it looks like the 40-week average of crack to crude may be headed up toward 20% where it traded in 2003 (see chart One-Year Refining Crack Percent of Crude Oil Futures, below). Similarly, deviations as far from the 40-week average as we have now did not last in the past. Meanwhile an uptrend for refining margin is matched by uptrends in crude oil and natural gas futures prices (see chart Six-Year Commodity Price Meter and table Six-Year and One-Year Natural Gas and Oil Futures, below).

Originally published on May 18, 2007.