CRAK: Stay Long Global Refineries (NYSEARCA:CRAK)

On a year-to-date basis, the VanEck Vectors Oil Refiners ETF (NYSEARCA:CRAK) has taken a fairly strong hit on the back of the losses seen to refining demand from the coronavirus.

Despite the fact that shares are down about 20% on a year-to-date basis, I believe that now is a good time to buy this ETF. Specifically, I believe that recovering global refining economics as well as general petroleum demand is set to increase the price of the shares which CRAK holds and that in the coming weeks, we will see the ETF continue trading upwards.

About CRAK

Prior to analyzing the fundamentals underlying CRAK, let’s take a quick peak at what exactly this ETF does. Put simply, CRAK is an ETF which allows investors to get direct exposure to refining companies which are directly profiting from refining operations. The table of holdings can be seen below.

If you skim down the list of names above, you’ll likely notice that this fund is not just holding United States refineries, but also is exposed to global refinery operations. In essence, when you are trading CRAK, you are trading the overall profitability of global refineries. With this in mind, let’s take a look at the fundamental picture to gain insight into what is happening in energy fundamentals.

CRAK’s Fundamentals

When it comes to understanding where CRAK is likely headed, the key benchmark we can observe is something called the refinery “crack spread”. This spread represents the difference between the price of refined products and the price of the crude which creates those refined products. It is a high level benchmark that can give a general gauge as per the profitability of refining.

At present, the refining economics are currently slumped somewhat following the volatility seen early this year. If you note the two charts above, you’ll see that the gas crack has seen the most retreating action while the distillate crack has generally held its ground.

What these charts essentially convey is that while there is currently some margin to be had buying crude and creating products at a refinery, the gasoline crack is weakening somewhat which is compressing margins. A typical refinery tends to target gasoline as its primary offtake, which means that given that the gas crack has been weakening over recent weeks, the fundamentals of CRAK have been weakening. Of note, since we have seen the recent 2-3 weeks of contracting gasoline economics, the price of CRAK has moderated somewhat and stalled in its current trend with today’s trading a few points shy of the lowest levels seen since June.

Essentially what is happening here is that we are seeing a stalling point in the trend of recovery in terms of gasoline demand. What this basically means is that while individuals have been returning to work and while many have been driving for summer vacations, the pace of gains is slowing as the very real problem of the coronavirus remains. What this means for fundamentals for CRAK is that whatever happens to the trajectory of the coronavirus is essentially what will happen to the refinery economics and therefore the revenues of CRAK’s constituents.

I believe that we are seeing a general economic improvement which while slow will continue to lead to higher levels of economic activity and therefore higher levels for both gasoline and distillate. Specifically, if you’ve been noticing the economic indicators like the CPI as well as the accommodative actions of the Federal Reserve, then you’ve likely observed that there are broad-based indicators as well as forces which are indicating ongoing recovery and strength. This recovery certainly hasn’t fully reflected through to petroleum demand, as seen by the lagging refining runs.

However, the trend does remain towards recovery, and I believe that because of this, investors should maintain a long bias on CRAK. The important tie-in here between the economy and CRAK is that the holdings of CRAK essentially represent the fuel of the economy. That is, any increase or decrease in economic activity will in some form or fashion reflect through to petroleum demand for transportation which will impact either the distillate or gasoline crack and therefore better the revenues of CRAK’s holdings. These stronger earnings will reflect through to higher prices of shares and the returns of the ETF.

It is important to caveat this analysis in that CRAK is actually an ETF which is holding global refining exposure; however, all of the prior analysis is based on United States data. The key assumption behind this analysis is that the economic trend of the United States will be generally reflected through to the total global economy. We unfortunately have to use this form of reasoning because quality data on the granularity provided by the United States simply doesn’t exist globally in all of the regions in which CRAK’s holders operate.

This said however, I do believe that the United States data is generally representative of the entire world at this point because we are seeing the same fundamental theme play out across the globe: the entire world is caught in a pattern of lockdowns or recovery from the coronavirus which means that globally, the theme is largely the same as it relates to energy economics.

Given that we are seeing similar patterns around the world, and given that economic conditions are slowly improving, the trend does remain supportive of an investment in CRAK. Since CRAK is essentially a position on the economics of global transportation fuels and since a strengthening economy is associated with strengthening transportation demand, the fundamentals remain supportive of an investment in CRAK. In other words, I believe that now is a good time to fade the short-term trend of a pullback in CRAK’s price and buy the ETF to capture continued upside in the fund.

Conclusion

Global refining markets have contracted over the past few weeks as the pace of recovery has slowed somewhat. An investment in CRAK represents an investment in the economics of refineries. Given that the global economy still is recovering, albeit slowly, an investment is warranted in CRAK.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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