The VanEck Vectors Oil Refiners ETF (CRAK ) participated in the energy sector rebound last month, posting a May gain of about 5%, but that doesn’t mean the lone refiners ETF is done rebounding.
CRAK tracks the MVIS Global Oil Refiners Index. That index “is a rules-based, modified capitalization-weighted index intended to give investors a means of tracking the overall performance of companies involved in crude oil refining which may include: gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals,” according to VanEck.
After languishing against the backdrop of slack demand created by the coronavirus pandemic, CRAK could offer more upside as Americans hit the roads and the skies after months of being subjected to stay at home orders. That pent up travel demand could boost activity for refiners.
“Despite the near-term uncertainty, we think investors should get interested in refining shares for two reasons,” said Morningstar in a recent note. “First, while destroying near-term demand, the coronavirus should not affect long-term demand, leaving our midcycle product margin and crude differential forecast unchanged. Second, valuations are attractive and continue to discount a return to normalized conditions.”
Calling on CRAK
Refiners have steadied and have been outperforming the broader energy sector in recent weeks, prompting some analysts to get bullish on the space.
CRAK and refiner equities don’t necessarily need oil prices to rally; they need demand and price stability. The U.S. refining sub-sector has been one of the most profitable sectors in the U.S. economy over the past five years. Importantly, refiners took steps to mitigate the impact of the COVID-19 crisis.
“Refiners acted quickly to reduce utilization to match demand levels,” according to Morningstar. “Utilization levels for April fell to 70% on average, compared with 89% in 2019. After bottoming at 68% in mid-April, utilization has begun to increase slightly, most recently to 71% the last week of April, but second-quarter guidance from refiners suggest further increases are limited, as most forecast approximately 70% for the quarter.”
Fortunately for CRAK and its components, it can rebound even without a major near-term uptick in jet fuel demand.
“We expect a quick recovery for the primary refined products of gasoline and distillate. We expect jet fuel demand to recover much more slowly notes Morningstar. “The uneven recovery in refined product demand could ultimately cause issues for inventories and margins that weigh on refiners’ profitability for the remainder of the year even as demand improves.”