Have You Prepared Your Portfolio for a Narrowing Brent-WTI Spread?

Rising crude supplies from the Middle East might play a spoiler, and refining margins might plummet over the coming quarters.

Jan 11, 2014 at 1:10PM

The Brent-WTI spread has widened from $0.86 per barrel in September to a current $13.59 per barrel. This widening has expanded the profit margins of several U.S refiners, which process the WTI crude, and sell its refined products at benchmark prices set by the Brent crude.

Heading into 2014, however, Commerzbank estimates that rising crude production from North Africa and the Middle East could cause the Brent-WTI spread to narrow to around $6 per barrel. These estimates suggest that refining margins could shrink over the coming months, and thus risk-averse investors might want to stay away from pure-play refiners like Western Refining (NYSE:WNR) and CVR Refining (NYSE:CVRR).

Risks involved with pure-play refiners
Several U.S refiners diversify their feedstock by processing different crude benchmarks. This way, their financial performance doesn't become heavily correlated with the historically volatile Brent-WTI spread. However, Western Refining and CVR Refining process just WTI crude, which is why their profitability varies with the fluctuating Brent-WTI spread.

2013 Quarterly Results



Phillips 66

CVR Refining

Western Refining


Net Income

Refining Margin/Barrel








Net Income

Refining Margin/Barrel








Net Income

Refining Margin/Barrel







(All figures, except for refining margin/barrel, are in millions – Phillips 66 total net income shown as opposed to its refining net income)

As illustrated in the table above, Western Refining and CVR Refining have shown exceptional bottom-line growth when the Brent-WTI spread widened. Conversely, both the refiners recorded a deep plunge in their net income when the spread narrowed. This correlation suggests that the profitability of Western Refining and CVR Refining will take a hit assuming the Brent-WTI spread narrows to $6 per barrel.

Their lack of diversification makes matters worse. Western Refining and CVR Refining are involved in only refining operations, so they don't have other business segments to add stability to the bottom line. In addition, both companies operate with just two refineries each, and unforeseen downtime at even one of these refineries could spell trouble.

Keeping these factors in mind, Western Refining and CVR Refining appear to be quite risky investment options. Their lack of diversification works against them whenever the Brent-WTI spread narrows, which is why downstream-focused investors might want to consider investing in Phillips 66 (NYSE:PSX).

Benefits of diversified growth 
Unlike Western Refining and CVR Refining, Phillips 66 is a well-diversified company. The company owns midstream and downstream assets, and is also engaged in the production of industrial grade chemicals. Altogether, these business segments add stability and result in more balanced growth.

Quarterly Earnings: Fiscal Year 2013


First Quarter

Second Quarter

Third Quarter










Refining Margin/Barrel







Marketing & Securities












(All figures except for refining margin/barrel are in millions.)

The above table illustrates the benefits of its business diversification. When the Brent-WTI spread narrowed last September, Phillips 66 wasn't hit as hard as its peers.

In addition to business diversification, Phillips 66 has also diversified its refining feedstock. The company processed 66% advantaged crude in the previous quarter, which includes WTI, Bakken, and other Canadian crude benchmarks. This refining mix ensures that Phillips 66 isn't heavily reliant on the Brent-WTI spread, and the company enjoys modest but stable refining margins.

To further boost its refining margins, Phillips 66 is planning to increase its Bakken crude input – which was about $10 cheaper than WTI crude between August and October. The refiner is developing an offloading facility at its Bayway refinery, which will allow its refinery to directly receive up to 70,000 barrels of Bakken crude per day, respectively. The offloading facility is expected to commence operations in the second half of 2014, presenting a medium-term bullish case for Phillips 66.

Final words
Since the financial performance of Western Union and CVR Refining is heavily correlated to the Brent-WTI spread, risk-averse investors might want to avoid investing their funds in them. On the other hand, Phillips 66 offers diversified growth prospects, which can deliver balanced growth over the long-term.

OPEC's nightmare is Buffett's dream
Imagine a company that rents a very specific and valuable piece of machinery for $41,000… per hour (that’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable LANDSLIDE of profits!


Piyush Arora has no position in any stocks mentioned. The Motley Fool owns shares of Western Refining. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information