What: Shares of independent refiner Tesoro Corporation (ANDV) rose to new all-time highs in July before receding slightly and settling near 15% gains for the month. Oddly, the move higher came as West Texas Intermediate prices fell nearly 21% and shares of the company's limited partnership Tesoro Logistics LP, of which it owns over one-third, fell 8% during the same time period. What's going on?
So what: There doesn't appear to be a simple explanation for the move higher. The most plausible catalyst would be the suddenly improving Brent-WTI Spread -- the price difference between petroleum in the United States and that in Europe and North Africa -- which soared over 43% in July. American refiners want the spread to be as high as possible. Why? They can refine cheaper domestic crude oil into various petroleum products and export them to markets where crude oil and refined petroleum product prices are higher, thus boosting margins from their competitive advantage.
When the Brent-WTI Spread hit all-time highs in late 2011, profits at American refiners followed. Additional storage infrastructure in the country's heartland and collapsing global crude oil prices have kept the spread in check in recent years, but it took off on July 1 of this year.
Brent WTI Spread data by YCharts.
Tesoro Corporation stock saw a major gain on the same day and tracked the peaks and valleys of the spread relatively closely in July.
Now what: The improving Brent-WTI Spread is certainly good news for well-positioned refiners, but it could deteriorate as quickly as it rose. While the markets are certainly challenging for refiners such as Tesoro Corporation, investors can find comfort in the reaffirmed full-year guidance for 2015, in which management expects EBITDA to reach $2.6 billion. Stay tuned for the company's upcoming second-quarter conference call later this week.
