February 25, 2002; Iraq, Growth or Seasonality May Widen Refining Margins

One of the dominant refiner/marketers in the Midwest, Marathon's profit rises and falls in part with the Chicago Crack Spread.  Our source is MRO for the industry numbers for the difference between the cost of three barrels of crude oil to make two barrels of gasoline and one barrel of heating oil (3-2-1).

Expectations for the next twelve months calculated from New York Mercantile Exchange futures have been stable for the past five months at a level higher than the current Chicago crack spread.  That is part of the reason to be interested now in a stock like MRO that has about a third of its value in refining/marketing.

With refining margins below normal, this may also be a good time to attack Iraq as there is some cushion in the system.  Yet anything can happen that might widen margins.  A little bit of widening makes a big difference to refiners before consumers see much impact.

The base case for the refining business is helped by the consolidation trend that puts capacity into stronger hands.  For example, inventory correction may be occurring more rapidly than in the past according to Bill Greehey, Chairman of Valero energy. 

Similarly, increasingly strict environmental rules should be helping refiners more rather than penalizing them as in the past.  Those who make the case for a stiff gasoline tax to encourage conservation indirectly make the case that consumers could support much higher refining margins.  We don't see high taxes on energy coming soon because the regional political issues are too strong to solve easily.

Finally each of the past two summers has been good for Marathon.  Consumers continue to drive more even though they may be flying less.