With Some Oil Profit Margins Squeezed, Choose You Oil Carefully

Includes: CVS, OIL, USO, XOM
by: Hard Assets Investor

Brad Zigler

The price of crude oil may be moving up, but that doesn't necessarily translate to increased profits for energy companies. Oil company shares, in fact, are moving lower with the broad stock market, as weak economic data is battering the energy sector.

The Amex Oil Index (AMEX: XOI) has fallen 10.3% this year while shares of Dow Jones Industrial Average components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) have dipped 8.2% and 7.1%, respectively. The Dow is off 8.7% year-to-date.

It's not just spillover from a sour equities market hitting oil companies. The rise in crude prices is also compressing profit margins. The "crack spread" - the gross profit available to a refiner from processing oil into its primary distillates, gasoline and heating oil - has declined for the fifth straight week.

Refiners no longer enjoy a double-digit profit margin. Since February 13, the crack spread has dwindled by a third from more than 15% to 9%.

April/May NYMEX Crack Spread Falling

April/May NYMEX Crack Spread Falling

Crude oil prices have risen 10% since the beginning of the year. Investing in oil, through oil futures or proxies such as the United States Oil Fund (AMEX: USO), or the iPath S&P/GSCI Crude Oil Index Total Return ETN (NYSE Arca: OIL) is one thing. Trading in the shares of oil companies is plainly another.

Still, a 9% gross profit margin is nothing to sneeze at. The equivalent of 70 cents per gallon of crude, that's not a bad take. After all, crushing soybeans into meal and oil yields a gross margin of only 6.5% now.

Process this: The profit margin for soybean crushers has actually risen 11.6% this year, despite a nearly 15% increase in bean prices.

You need to pick carefully which oil market to enter.