Market Vectors, the exchange-traded fund issuing arm of investment management firm Van Eck Global, recently launched a “first-of-its-kind” US-listed ETF that offers a pure play exposure in global refiners.
While its common knowledge that US oil and gas producers (in the “upstream”) are bleeding, the story is quite different for oil refiners (in the “downstream”). The refining sector could actually make a killing despite crude oil prices plunging more than 60% since last summer due to low feedstock and main input costs.
That should be music to the newly launched Market Vectors Oil Refiners ETF (CRAK) and investors looking to profit from the energy sector’s decline. Oil refiners earn their profits from the difference in crude input costs and the selling price of refined products. While input costs for most refiners are decided upon the light sweet Western Texas Intermediate (WTI) oil or the heavy sour Western Canadian Select (WCS) crude oil benchmarks, prices of gasoline in pumps and other refined products are typically priced based on Brent crude, which mostly trades at a premium over WTI (or WCS).
In industry parlance, crack spread indicates the difference in price between crude oil and its refined products, and is considered as a common indicator of potential profitability. Oil refiners tend to react differently to crude prices compared to other energy sector companies.
If the price differential between WTI (or WCS) and Brent crude widens, refiners processing WTI (or WCS) become even more attractive. Since the price of natural gas, which could be used for powering cracking and refining facilities, is running near new lows, investors could make some extra coins despite the bear run in energy markets. Also, oil refiners show lower correlation to oil prices than oil services firms including storage & transportation or equipment & services companies.
The new fund tracks the Market Vectors Global Oil refiners Index, a modified market cap weighted index that measures the performance of the largest and most liquid refining companies in the world.
Indeed, while the S&P Global Energy Sector Index has returned minus 25.46 percent in the 12 months through 6/30/2015, the refining & marketing sub-industry returned +13.71 percent during the same period. To be considered for inclusion in the index, firms must generate at least 50 percent of revenues from crude refining and meet certain liquidity and capitalization requirements.
Top holdings include such US refining heavyweights as Marathon Petroleum, Phillips 66, Valero Energy, Tesoro Corp and HollyFrontier Corp.
The fund has a gross expense ratio of 0.64 percent and a net expense ratio of 0.59 percent.
Disclosure: No holdings