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How Will a Shrinking Brent-WTI Spread Impact Oil Refiners?

http://www.fool.com/investing/general/2014/04/21/how-will-a-shrinking-brent-wti-spread-impact-oil-r.aspx

Lior Cohen
April 21, 2014

Last week, the premium of Brent over WTI dropped to its lowest level in months. This recent fall is part of a downward trend that could have a negative effect on oil refiners, including Valero Energy (NYSE: VLO) and Marathon Petroleum (NYSE: MPC). Let's take a closer look at the impact the Brent-WTI spread has on these companies' profit margins.

Despite the recent recovery of the oil market, the spread between Brent and WTI crude narrowed to single-digit territory. The chart below shows the progress of the premium of Brent over WTI year to date. 

Data from U.S Energy Information Administration 

As you can see, the premium fell from around $15 at the beginning of the year to around $5 as of last week. Moreover, the average first quarter premium was around $9 -- nearly $9 below the average recorded in the same quarter a year back. This lower premium cut into refiners' profitability in the first quarter. 

The chart below presents the changes in the quarterly gross profit margin of Valero Energy and Marathon Petroleum and the average quarterly premium of Brent over WTI. 

Data from U.S Energy Information Administration and Google Finance

The chart shows the relation between the profitability of these companies and the shifts in the Brent-WTI premium. As of the fourth quarter of 2013, the average premium was nearly $12 -- the highest level since the first quarter of 2013. This higher premium improved these companies' profitability. Their revenue also grew during the quarter. Therefore, the modest decline in the premium reduced their profitability during the first quarter. 

Based on the above, Valero Energy and Marathon Petroleum's first quarter reports are likely to show a modest decline in profitability. </