The Market Vectors Oil Refiners ETF (CRAK, Financial) launched on Aug. 18 and is a terrific option for those who want energy exposure but don’t necessarily believe in higher energy prices.
Typically, downstream operators such as refineries outperform when oil falls. Upstream companies (drillers) hurt the most. Those with diversified operations such as Chevron (CVX, Financial) or Exxon (XOM, Financial) are in the middle of the pack.
As the graphic below shows, refineries can be a terrifically profitable way to invest when every other energy investor is hurting.
How Are Refineries Outperforming?
Accoring to Van Eck, the ETF’s manager:
“The profitability of refiners is generally influenced by the spread between the cost of crude oil and the prices at which refined products can be sold, commonly known as crack spreads. Oil refiners have tended to react differently to the price of oil compared to other energy sector companies. Historically, the return profile is differentiated from other segments of the sector, a trend that has persisted year-to-date.”
Basically, it all has to do with input costs. Lower oil prices mean lower input prices, usually resulting in higher margins. Lower oil prices also stokes gasoline demand. As long as gasoline prices remain depressed, refineries will continue running at incredibly high capacity utilizations.
CRAK Is a Great Way to Take Advantage
Predictably, 100% of CRAK’s holdings are exposed to the energy sector, with a vast majority having direct involvement in the refinery business. CRAK has 25 holdings and no one investment comprises more than 10% of the portfolio.
Another plus is its geographical diversification. Many times, refineries are enjoying varying degrees of profitability across the world as input prices vary slightly depending on how close the refineries are to import or export terminals. With over half of the stocks being domiciled outside the U.S., investors can mitigate most of this concern.
Given its position in the industry’s supply chain, CRAK could be one of the only options in the energy space to have positive returns should oil remain depressed.
