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Oil Refiner ETF (CRAK): A Better Buy Amid Weak Energy

Thanks to an ever-increasing production, a large supply glut and sluggish demand, oil price skidded to half over the past one year, making the commodity the worst nightmare. In fact, trading in oil became wilder last month after China devalued its currency and weaker economic data raised worries over the health of the world's second largest economy, suggesting lower demand for crude.

Currently, U.S. crude is hovering around $45 per barrel while Brent crude is trading above $48 per barrel. Market participants are bearish on oil prices for at least the short term as global developments are expected to add to the supply glut. This is because the U.S. is still producing oil at near record levels, the Organization of Petroleum Exporting Countries (OPEC) is pumping out maximum oil in more than three years, Iran is looking to boost its production once the Tehran sanctions are lifted and inventories continue being built up.

On the other hand, demand seems muted at present given the persistent slowdown in China as well as sluggishness in Europe, Japan and other key emerging markets. The International Energy Agency (IEA) in its recent monthly report stated that the global oil market would remain oversupplied throughout 2016 though lower oil prices and a strengthening economy will boost oil demand at the fastest pace in five years (read: Summer Madness to Nut Case? A Fall Preview of ETFs ).

Oil Refining Thriving Amid Oil Prices

Given the unfavorable fundamentals and a bleak oil outlook, almost every corner of the energy segment is suffering except oil refining, which is negatively correlated with the price of oil. This is because the players in this industry use oil as an input for processing refined petroleum products like gasoline. Hence, lower oil prices are boosting margins for refiners, leading to healthy stock prices.

This trend is likely to continue if crude prices (input costs) remains lower or continue to fall further, leading to higher spreads. Spread is the difference in price between a barrel of oil and a barrel of refined product like gasoline, diesel, or jet fuel. As a result, the higher the spread, the more the profits will be for the oil refiners.

That being said, as long as the spread remains stable at the current levels, refiners are expected to outperform the rest of the energy sector. Further, continued outperformance in the oil refining and marketing industry is well justified by its solid Industry Rank in the top 15% .

Investors could tap the rising opportunity in this niche segment with the new Market Vectors Oil Refiners ETF ( CRAK ) recently launched by Market Vectors. It is a one-stop shop for investors to play the oil refining market (read: Market Vectors Files for First Oil Refiners ETF ).

CRAK in Focus

CRAK looks to follow the Market Vectors Global Oil Refiners Index. The benchmark measures the performance of the largest and most liquid companies in the global oil refining segment. Companies eligible for inclusion in the index should generate at least 50% of their revenues from crude oil refining including gasoline, diesel, jet fuel, fuel oil, naphtha, and other petrochemicals, or have at least half of their assets devoted to the refining of crude oil.

The product is getting the first-mover advantage as it has accumulated $1.8 million in its asset base within three weeks of its inception. It currently trades in a lower volume of about 14,000 shares a day on average.

Any Downside Risk?

The fund is heavily concentrated on the top 10 firms with the huge allocations to Phillips 66 ( PSX ), Marathon Petroleum ( MPC ) and Valero Energy ( VLO ) that collectively make up for one-fourth of the portfolio. This increases company-specific risk and suggests that the top firms dominate the fund's returns. While VLO was recently upgraded to a Zacks Rank #2 (Buy), PSX and MPC were downgraded to a Zacks Rank #3 (Hold) each.

Further, the fund is not a pure American play and is hence exposed to currency risk. More than half the portfolio offers international exposure, namely Japan, India, South Korea, Poland, Taiwan, Portugal, Finland, Turkey, Australia, Thailand and Greece (see: all the energy ETFs here ).

Investors should note that it is a relatively high cost choice in the energy space. It charges a bit higher fee of 59 bps compared with the expense ratio of 0.15% for the broad sector fund - Energy Select Sector SPDR ( XLE ).

Bottom Line

Given the encouraging outlook for the oil refiners, CRAK could prove to be the lone star in the energy space in a plunging oil price environment.

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MKT VEC-OIL REF (CRAK): ETF Research Reports

SPDR-EGY SELS (XLE): ETF Research Reports

PHILLIPS 66 (PSX): Free Stock Analysis Report

MARATHON PETROL (MPC): Free Stock Analysis Report

VALERO ENERGY (VLO): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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