Why the Refining Industry Should Benefit From Falling Oil Prices

Isac Simon, The Motley Fool
Updated

With the European sovereign-debt crisis worsening by the day, the market fears a fall in crude oil demand. Consequently, crude oil prices have dipped to their lowest in more than a year. Among the most popular pricing benchmarks, the West Texas Intermediate, or WTI, blend -- currently at a little more than $83 a barrel -- has hit an 18-month low. However, there's an industry that should benefit from falling oil prices: refining and marketing.

A struggle so far
Refining companies have been struggling with high input costs for the past few months, thanks to high hedged crude oil prices. Except for a few, such as HollyFrontier (NYS: HFC) , which took advantage of the Brent-WTI spread, most refiners without easy access to the cheaper WTI blend -- compared with the costlier Brent -- had been fighting a losing battle. For example, Valero Energy (NYS: VLO) had to shut down its Aruba refinery and realize a $611 million loss in asset impairment in the first quarter, leading to a $432 million net loss. Integrated oil and gas giant Chevron's (NYS: CVX) refining segment suffered similar losses in the fourth quarter of 2011.

A silver lining?
Now, however, things could be changing. With lower crude oil prices, refiners should see lower input costs -- which should result in higher margins. And unless some major supply disruption takes place, the eurozone crisis should keep prices from shooting up.


Fellow Fool and energy editor Joel South says that impending events across Europe in the next few weeks could further affect international crude prices. Analysts at Credit Suisse are looking at a worst-case scenario of $50 a barrel. In other words, we could see crude prices dipping even further.

Last month, I wrote that a fall in demand for oil could become a reality, causing prices to tank. In addition, emerging economies such as China and India are expected to slow down, obviously putting the brakes on growth in oil demand.

The best prospects
Investors should especially keep an eye on the newly spun offPhillips 66 (NYS: PSX) , Marathon Petroleum (NYS: MPC) , and HollyFrontier. Phillips 66's advantage lies in its network of refineries spread across various locations in the United States. Accordingly, these refineries have the capacity to process all types of crude without exception.

Marathon and HollyFrontier enjoy the strategic advantage of having their refineries located in the Midwest, with easy access to WTI crude because of the presence of the storage hub in Cushing, Okla. These two companies are arguably among the best positioned to take advantage of the Brent-WTI spread.

Foolish bottom line
Prospects for the refining industry are looking bright overall, and investors should keep a close watch on these companies. You can keep abreast of the situation by adding these companies to your free Watchlist.

If you like energy stocks, we have a stock idea that could knock your socks off. Read about it in the Fool's special free report on the energy industry and its best prospects. It's free for a limited time, so grab your copy today.

At the time thisarticle was published Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Chevron. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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