Oil price plunge benefits some industry players | Wichita Eagle

Everybody knows the oil industry has been in a terrible slump since the price of oil dropped last fall.

Actually, that’s not completely true.

Sure, oil drillers have been in a difficult way, with cost cutting and layoffs across the United States, including in Kansas. But other segments are doing pretty well these days.

Click to resize

The nation’s refiners are doing quite well, thank you. It’s a classic supply-chain whiplash: One segment has suffered a shock, to the temporary benefit of other segments.

In this case, generally high oil prices in recent years fostered an absolute explosion of oil production in North America at the same time the global economy was growing only very slowly. Over several years that has contributed to a worldwide glut of oil, which has particularly affected the U.S. because of the ban on U.S. oil exports as a safety valve for excess U.S. production.

So, the U.S. has plentiful oil and plentiful oil production for now. With gasoline prices down and economic growth speeding up, demand for gasoline, diesel fuel, heating oil and other oil products continues to climb. And it means strong profits for refiners.

It’s pretty simple really, said industry analyst Jim Williams of WTRG Economics.

“The demand for their product has gone up, while the cost of their feedstock (crude oil) is a lot lower.”

The crack spread

Kansas has three refineries: the HollyFrontier refinery in El Dorado, the NCRA refinery in McPherson, and the Coffeyville Resources refinery in Coffeyville.

One of their key metrics is called the crack spread – the difference between the cost of crude oil they buy and the price of gasoline they sell – which goes a long way to defining their profitability.

The U.S. Energy Information Agency said in May that the crack spread had hit a several-year high, even as oil inventories continue to pile up.

In an April conference call with analysts, Jack Lipinski, president and CEO of CVR Energy, parent of the Coffeyville refinery, called the present price environment highly unusual.

“This is the first time in my career, however, that we’ve seen a situation where there is pressure on crude pricing at the very same time we have excellent demand,” he said on the call.

Producers throughout central North America, from Canada to West Texas, continued to produce more oil than was consumed. The amount of oil sitting in storage tanks, such as the massive tank farm and pipeline hub at Cushing, Okla., hit a record high in April.

Refiners are at the mercy of the crack spread, and that’s sometimes painful, noted Charlie Drevna, president of the Institute for Energy Research.

In 2008, when oil prices shot up to $140 a barrel, gas prices shot up to $4 a gallon – and a lot of people decided to stop buying gas. Refiners were sometimes making gasoline at a loss just to fulfill contracts or have cash flow.

Today, he said, refiners are seeing the reverse, with lower crude prices and higher demand.

Reversal

But all that may be in the process of correcting itself, or at least changing.

Traditionally the price of oil and price of gas generally track each other, and the refiners simply capture a small margin.

Since March, drillers have cut back on the amount of oil produced. The inventory at Cushing has fallen. The price of oil has risen about $10 a barrel.

However, the price of gasoline is also rising. According to website GasBuddy, since April the price of gas in Wichita has risen about 40 cents a gallon to $2.60.

That may again re-establish the direct connection between the price of oil and the price of gasoline.

“It’s hard to predict,” said Joanne Shore, chief industry analyst for the American Fuel & Petrochemical Manufacturers.

“When there’s an increase in the price, there’s more incentive to produce more and you would expect at that point it will pinch margins. The question is when.”