Posts by Hoekstra Trading LLC
What’s the missing piece in Phillips 66 refining profit problem?
Investors are puzzled over Phillips 66 (PSX) refining profits. Here is a comment from a PSX stock investor last week: “The 2nd quarter Pre-Tax Profitability Chart shows PSX’s refining business loss $729 million. This is perplexing as (i) Figure 5 indicates crack spreads were generally higher than crude costs for the second quarter (though that…
Read MorePoor refining profitability puzzles investors
An Aug. 16, 2021 article titled Phillips 66 Stock: Advantaged By Its Refining-Adjacent Businesses, by Laura Starks was published on seekingalpha.com. Below are excerpts of investors’ comments on seekingalpha.com Comment by Fwc3030 17 Aug. 2021, 7:31 AM Ms. Starks, Thank you for a well written over-view of Phillips. Your writing style is to be commended…
Read MoreToday’s octane economics
Because octane can seem confusing, consider a more familiar commodity, wine. Imagine you own a vineyard. You produce wine for $4/bottle, distribute it in cases for $24/bottle and sell it in your shops for $34/bottle. Your margin is $20/bottle for case sales and $30/bottle for bottle sales. A neighbor makes identical wine and sells it…
Read MoreRefining’s margin capture problem — here’s the hidden cause
A sore point in US refiners’ 2021 earnings has been low “margin capture” rates. Margin capture refers to actual realized margin compared to a market-based benchmark margin. For example, this chart from Phillips 66 (PSX)’s 2nd quarter earnings conference call shows a market-based benchmark margin of $17.76/barrel (left tan bar), and an actual realized margin…
Read MoreRefiners rebuffed again on RIN price pass-through
In an eight-year battle over Renewable Identification Numbers (RINS), refiners have failed to get much relief from their RIN obligations. Last Friday, July 16, 2021, an appeals court rejected their latest effort. The core issue was the “pass-through theory”, which says refiners’ RIN costs are recaptured in the market prices of the gasoline and diesel…
Read MoreHidden costs of Tier 3 gasoline hurt refiners’ gasoline production and profit margins
For the first time, US refiners are being challenged to meet the EPA’s Tier 3 10-ppm sulfur gasoline specification while making gasoline at full rates. This is causing an “octane/sulfur squeeze” which also puts the squeeze on gasoline production, crude flexibility and profit margin capture: Many US refineries are under-equipped to make Tier 3 gasoline…
Read MoreA billion dollar question: do refiners recapture RINs expense?
There is much confusion in the refining industry on whether and how $billions/year of Renewable Identification Number (RIN) expenses are being passed through and recaptured by refiners in their profit margins. The issue has been around for many years and re-surfaces during run-ups in RIN prices. For example, in the Phillips 66 first quarter 2021…
Read MoreNew gasoline specification is increasing gasoline prices
As gasoline demand increases, a new specification is increasing gasoline prices. The specification, called the Tier 3 Standard, limits gasoline sulfur to 10 ppm maximum versus the previous (Tier 2) 30 ppm limit. The Tier 3 Standard was enacted in 2014 and phased in starting in 2017, with full implementation in 2020. Now is the…
Read MoreUnderstanding RIN Price Fundamentals
It has been proven the pricing of D4 RINs follows basic economic and asset pricing theory. In 2020, the theory was cast in the form of a mathematical model by professors from the The University of Illinois and Harvard University. Hoekstra Trading implemented their model, which I call the IMS model (IMS is an acronym…
Read MoreHoekstra Trading RINs price spreadsheet model
This chart shows, in green, the price of D4 RINs traded from 2011 through March 2021: The black line represents a theoretical pricing model for the D4 RIN developed by professors at The University of Illinois and Harvard University. Their modeling work shows the D4 RIN price responds in a rational way to changes in…
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