When crude oil prices rise faster than operating costs in the field, production profitably rises. This prospect causes investors to boost earnings estimates, sometimes rapidly. But production profits are only part of the story. When crude prices rise, the cost of feeding oil into the companies' huge refining complexes goes up and if prices of gasoline, heating oil, etc., don't rise proportionately, refining and marketing profits will fall. As with crude oil, demand for refined products and inventory levels are critical to margins.
Demand has to be strong to push prices up enough to offset cost increases.
Refining margins rose in the four stock outperformance periods since 1986 when oil prices were falling. Operations of individual companies differ with respect to geography, scale, and product mix, and the best predictor of company and stock performance is the balance between changing oil prices and refining margins. Domestics' earnings rise more rapidly with oil price and refining margin expansions, but they also fall back to earth more rapidly when those earnings drivers crater. The Earnings Sensitivity chart the earnings impact of one dollar changes in oil prices and refining margins on each of the integrated oil companies. During the last three months of the year, though, oil prices continued to rise, and refining margins then went into free-fall, as sharply higher crude costs hit that side of the business.