Squeezing Profits out of Oil

By Brad Zigler

Economic machines are like gizmos in the physical world: Increase the cost of the inputs and a machine's profit-making efficiency is bound to be compromised unless the price of the outputs can also be raised.

Oil refiners have been struggling to maintain profit margins this year as the cost of their inputs has risen dramatically. The NYMEX November crude oil delivery, for example, has risen 21.9% since the beginning of the year.

The returns garnered by outputs, measured by heating oil and gasoline futures, have been a mixed bag. December unleaded gasoline futures have climbed 16.4% this year, reflecting some elasticity of demand, while December heating oil's advanced a whopping 26.4%.

Just this week, November NYMEX crude gained $3.97 per barrel, or 3.6%. Unleaded gasoline futures fairly well matched crude oil's gain, moving up 3.5%, or 10 cents a gallon. Appreciation in the December heating oil delivery's price was a more modest 8 cents per gallon, or 2.6%.

All told, the gross refining margin reflected through futures has been squeezed down to 8.7%, a level not seen since early March. Last week, the November/December crack spread yielded 9.2%.

Even with that compression, refining's a more profitable venture than many other businesses. Soybean processors, for example, would be very happy with an 8.7% processing margin this time of year. As it stands now, the November/December crush spread mimicked by CBOT futures yielded 7.7% at yesterday's close.

Soybeans for November delivery fell 15 cents per bushel, or 1.2%, for the week ending Wednesday. The December outputs also weakened, as bean oil eased a scant 0.7%, while soy meal ticked down 1.2%.

For the year, bean prices are up 9.6%, oil has gained 21.2% and meal has inched up 1.5%. Put together, that's boosted the gross processing margin better than one percentage point from the 6.6% level at the beginning of the year.

The question now is: At what point will it be better to be in the bean business rather than the oil business?

 

Gross Profit Margins: Oil Refining vs. Soybean Processing

 

Comments

[Ames Tiedeman]

OIL is a short at the moment.