Refiners Should Cheer Falling Oil Prices


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

The stock market as a whole is having a rough day after Caterpillar reported earnings and growth projections that fell well below expectations. The heavy-equipment maker reported a decline in revenue in the Asia-Pacific region, which investors are looking to for growth, and this has led to some unease on the market today. The Dow Jones Industrial Average has fallen 0.38% in late trading on widespread losses.

Oil prices are down again today, falling to near $97 per barrel. If Asia's growth isn't as strong as expected, we could be in for a decline in oil demand, which would be bad for oil prices and a lot of energy companies. Three companies that should buck the trend are Marathon Petroleum , Tesoro , and Valero Energy , which have a lot to gain from falling oil prices.

Lower oil prices will help improve these refiners' earnings. Refiners buy oil and turn it into gasoline, so they profit from the spread between those two commodities. If the spread widens, profit goes up; if it falls, profit goes down.

WTI Crude Oil Spot Price data by YCharts.

You can see above that the price of oil has risen rapidly since the start of July, and gas prices didn't follow suit. This means profits should be down in the third quarter, and it's no surprise that stock prices for Marathon Petroleum, Tesoro, and Valero Energy have been as well.

MPC Total Return Price Chart
MPC Total Return Price Chart

MPC Total Return Price data by YCharts.

Today's price movement is just a reaction to the drop in oil prices and the profit potential it creates for refiners.

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