Entering text into the input field will update the search result below

Crude Oil And Crack Spreads Weigh On Valero Shares


  • Risk-off puts the oil market on an elevator to the downside.
  • Crack spread move lower as products underperform.
  • OPEC and central banks should announce emergency measures.
  • Valero shares tank.
  • We have been here before.
  • Looking for more stock ideas like this one? Get them exclusively at Hecht Commodity Report. Get started today »

Crack spreads measure the cost of refining a barrel of crude oil into oil products, which are gasoline and distillates. Crack spreads offer clues about the demand for crude oil. Direct consumers fill their cars with gasoline and heat homes with heating oil, a distillate fuel. Indirect consumers fly on planes, purchase goods that come to market in vehicles powered by diesel or fly on planes that require jet fuel or other modes of transportation that need distillates. The demand for oil products translates to the need for crude oil, which is the main ingredient in the cracking process.

Crack spreads are also a real-time indicator for the earnings of companies that refine crude oil into products. These businesses have no direct exposure to the price of crude oil or products as they purchase the input at market prices and sell their output at the current rate. However, companies like Valero Energy Corporation (NYSE:VLO) make or lose money based on the crack spread or the differential between the price of oil and the products. When crack spreads rise, profits increase. When then decline, profits fall or turn into losses.

Even as the stock market rose to new record highs in January and February 2020, energy-related companies did not participate in the rally. When the price of oil spiked to a high of $65.65 per barrel on January 8, oil-related shares continued to lag both the stock market and the price of the energy commodity. Meanwhile, as the price of oil and stocks turned sharply lower, energy companies have declined to the lowest level in years. The current risk-off environment has sent the price of Valero shares to the lowest price since June 2017, which could be an opportunity.

Risk-off puts the oil market on an elevator to the downside


The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

This article was written by

Andrew Hecht profile picture

Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.

He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (27)

Andrew a lot of shorts in oil at what point do u get long?
I’ll wait for $48 at this point and reconsider there.
A fine opportunity to reestablish a VLO position is almost at hand. Below 62 would be a no-brainer, irrespective of the sophomoric political comments and speculation.
I sold a 64.50 put yesterday expiring Friday. I got $1 so net cost would be 63.50. Frankly I’m more than happy to hold at that price.

I typically sell upside calls after I buy but I don’t think I’ll do it until the stocks above $70. I’d hate to sell a call and then have the stock jump 10% in 2 weeks. I feel a “low value” for vlo is $75 and a “high value” is $90. Anything outside that range is really extended.
m8 profile picture
great article. Buffet will be building a position. PSX too?
magichr profile picture
warren buffet is a kid in a candy store right now.
Here2Learn&Earn profile picture
Issue this time is "Are we heading into a worldwide recession?" There are many indications pointing to it. The Fed & other Central Bank puts will not help this time. The tremendous ever increasing debt and eventual collapse of currency is coming our way, to keep this story short. VLO puts may work out for a while, though. At what price and expiration are you selling yours?
Valero is primarily in the U.S. (small operations in U.K.) I think the U.S. economy will continue to do fine.
Tadpoles_UK profile picture
For clarification, the crack spread gives an approximation of the profit margins available to fuels refiners. It has no connection to the cost of processing oil. (Correcting first sentence in the article.)
TrackAddict profile picture
It's not just crack spreads, its also RINS. If the EPA pulls all the ethanol waivers we could see RINS back over $1 very quickly. They have already jumped from 10c to 40c. In previous years when RINS were high, VLO has spent close a Billion $ a year, so this could have a big impact on earnings
Visual Capital profile picture
@Andrew Hecht How does one get a chart for crack spreads for free?

Given this risk off environment, what valuation metrics would you use to buy VLO ( P/cash flow)?
Bitzap profile picture
Got to tradingview.com, and put:


as ticker. That gets you 3-2-1 crack spread.

Click full-featured chart, for, well, a full-featured chart. You can put the above in a watchlist too.

I use tradingview.com for all my "stay on top of the market" charting.
I liked the article but the bottom line is "cyclicals are cyclical".

If you believe that the business will recover when the economy does now is a good time to buy and/or hold and enjoy the dividends if you have a full position. If not, sell and invest your money elsewhere.
Willard Cook profile picture
It pays a 4+ percent dividend to wait for the rise in shares. VLO is best in class and can do okay in this environment
Try 6%.
ogilbert profile picture
Is the “current price level under $70” a compelling SALE? Or a compelling Buy?
Frankj78 profile picture
Yeah. I think he meant a compelling BUY.
Comanche4 profile picture
love your question, actually stimulated the same response in me!
The Private Island Saver profile picture
Long VLO, bet on mean reversion in crack spreads.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About VLO

SymbolLast Price% Chg
Market Cap
Yield (TTM)
Rev Growth (YoY)
Short Interest
Prev. Close
Compare to Peers

More on VLO

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.