Brad Zigler

Commodities vs. Commodity Stocks Redux

Fred & Sakata -

To get longer-term perspective on gold/gold stock performance and a look at the current dynamic, see today's "Desktop" at Hard Assets Investor: www.hardassetsinvestor...

Pure Refiners in Play

The prices used in the margin calculation come from futures, not options. And there's a direct relationship between futures and physical prices, known as basis, which commercial users have long traded in their hedging operations.

Futures prices are not just the sum of speculative bets. In fact, commercial users make up the vast bulk of crude oil futures open interest.

The instantaneous price discovery mechanism represented by futures is a reflection -- and sometimes a driver -- of spot pricing.


On Jan 15 03:51 PM I-investor wrote:

> OK Brad, you're right, no index is used. When trading crack spread
> options, a single options position results in two offsetting futures
> positions when the option is exercised. So the resulting crack spread
> is derived as the product of two separate speculative bets. It has
> little to do with what is really happening in the marketplace where
> physical gasoline and distillates are refined.
>
> Whatever falls out of some traders in Chicago is not primary information.That's
> why I am the only one who commented on your article, and I got two
> positives, to your one. If you want to know how the refinery business
> is going, you got to talk to the people in the refinery business.

Pure Refiners in Play

But that's NOT how refining margins are derived using NYMEX prices.

First of all, indexes aren't involved in the calculation of a crack spread. The sum of the refined product prices (gasoline and heating oil) are substracted, in ratio, from the price of crude oil. The margin represents the excess value of the crack expressed as a percentage of the input cost. That's what is depicted in the article.

The 3-2-1 crack turned negative for only one day -- an anomaly caused by the short queeze in the expiring October crude contract. Other than that, its seasonal nadir was reached on October 7th at $3.62 a barrel (a margin of 4%)

The persistent negative value you reference was the 1:1 crude oil/gasoline crack which dipped into the red for about two months (October-December). Prices for othe distillates (such as heating oil), however were high enough to keep the overall crack spread positive.

You're right about one thing: a 1:1 single-product crack doesn't reflect the refining return.

On Jan 14 01:48 AM I-investor wrote:

> The NYMEX refining margins are created by subtracting the oil futures
> index from the refined gasoline index. As such it is highly imperfect
> indicator and does not capture the prices achieved by market participants.
> Last quarter, SUN blew away all of the analysts estimates. The NYMEX
> refining margins actually went negative, when in fact the refiners
> were making good profits. SUN said it was because they were able
> to buy oil more cheaply than the analysts thought. Now the speculators
> at NYMEX are adjusting thier positions.