Volatility Cuts into Profits

By Brad Zigler

Wednesday's rally in the petroleum and soybean complexes drove up input costs, cutting into refiners' and processors' margins. The oil patch got the worst of it, though, as the NYMEX May/June crack spread shrank by more than $6 per barrel to $33.21. At that level, refiners capture a gross profit of 10% from each barrel of oil. Last week, the profit margin stood at 12.5%.

Crude oil closed sharply higher on Wednesday due to a larger-than-expected drawdown on stocks. Profit taking set in after the $112-per-barrel mark had been breached by the NYMEX spot contract, bringing the benchmark price down to $110.87 at the close. For the week, the May contract advanced $6.04, or 5.8%. The United States Oil Fund ETF (AMEX: USO) gained 5.9% to $88.70.

Gasoline stockpiles declined too, largely due to seasonal sluicing of winter-grade fuel. Low refinery production heading into the warm-weather driving season has raised concern among some traders. Refineries are currently operating at 83% of capacity when they'd typically be working at 89% to 90% this time of year. Still, gasoline stocks on hand are 10% higher than year-ago levels. This week, the June gasoline contract inched up 2 cents per gallon, or 0.6%, to $2.7722. The United States Gasoline Fund ETF (AMEX: UGA) inched up 0.2% to $51.21.

Heating oil extended its rally into record high territory yesterday when traders reckoned with a surprisingly large decline in stocks. In the aggregate, distillate fuel inventories are off nearly 12% from last year. For the week, the June heating oil contract gained 25 cents a gallon, or 8.7%, to settle at $3.1655.

Soybean Complex

The soybean market faced its own inventory number barrage from the government yesterday in the form of the Agriculture Department's supply/demand report. The weight of increased domestic and world supplies was shrugged off by traders. Ending stocks rose from 140 to 160 million bushels. Higher export and crush estimates added to the market's bullish psychology, aided by softness in U.S. dollar cross rates and talk of strikes by Argentinean farm groups. November beans jumped 74 cents per bushel, or 6.4%, this week. The iPath Dow Jones-AIG Grains Total Return Sub-Index ETN (NYSE Arca: JJG), with a 43% allocation to soybeans, ticked up 2.6% to $64.85.

Bean oil was the big winner this week as U.S. expor2s continued to fill in the supply gaps in the Asian markets. The December contract's price hiked up 15.4% to 59.85 cents per pound over the past seven days. Meal for December delivery ratcheted up 4.8% to $311.50 per ton.

The soybean crush estimate was raised by 5 million bushels to 1.84 billion bushels, mainly on stronger-than-expected product exports. In a near-lockstep move, the November/December gross processing margin eased 2 cents per bushel, or 1.6%, for the week. Processors can now look for a margin of nearly $1 per bushel, or 8%.

Though the bean crush margin is narrower than that currently enjoyed by oil refiners, agricultural processing spreads have been decidedly less volatile this year. Week to week, the reward-to-risk ratio favors beans over petroleum by a 3-1 margin.

Processing Margins Eased This Week