Refining margins and crude price

Linking to a comment exchange with Geoff Styles in response to his recent post on the oil earnings backlash. My initial reaction was that it seemed like Geoff was implying that refining businesses are structurally short crude and therefore oil majors are not as long oil as we think they are.
I agree with you and Robert that the majors are price takers, and accusations of "gouging" are generally misguided, but it's misleading to imply that they are not way long crude price. High prices are great for upstream and generally passed through by refining (unless there's some evidence that refining margins shrink when crude prices rise?), so on net a clear plus for the integrated majors.
In brief, I ran a few quick correlations based on this refinery margin data, and came out with R squareds of approximately zero. This would indicate no consistent relationship (i.e. full price pass-through over time), although I recognize that the analysis is crude and I'd welcome any improvements or corrections.

Also keep in mind that while refining margins don't rise and fall with crude prices, it's a highly cyclical industry, and through-cycle returns are pretty thin. Not a place I'd want to be sinking a lot of capital right now, especially with lots of NOCs building refinery capacity for reasons often more related to jobs than pure financial returns.


  1. I often get asked about the correlation between refining margins and oil prices. I am glad you did that calculation.

    Refining margins tend to get squeezed if oil prices rise due to supply constraints, but are buoyant if the crude price rises are due to demand factors. So this would suggest no correlation.

    Capacity utilisations in the sector tend to vary with margins which helps with price rise pass through.

    I agree with you on the problems of investment by NOCs. It is amazing to see the investment plans of companies like Petrobras or Saudi Aramco which seems to be a determined effort to waste the earnings from the upstream rather than create new value.

  2. Thanks for your comments. I tend to believe that utilization and excess capacity are the most important drivers of refining margins. I can see the logic for how supply vs. demand shocks would affect margins differently in the short term, but my broader point in this post was that by and large prices get passed through (albeit with some lag) and that is why correlation is weak.