For much of the period following the decontrol of crude oil prices during the first Reagan administration and the closure of inefficient refineries that were dependent on artificially cheap crude oil feedstocks, refiners enjoyed the returns that accrue to scarce assets. Capacity declined into 1995, and utilization rates actually exceeded 100% of nameplate capacity at certain times.

Not The Scarce Asset It Once Was Source: Bloomberg

If we combine this scarcity with strong and rising demand for refined products in the face of higher prices, we have a real recipe for success. The process margin as measured by the seasonally adjusted 3-2-1 crack spread, three barrels of crude oil refined into two barrels of gasoline and one of heating oil, surged into June 2007; it soon turned lower in the face of crude oil's explosive rally into July 2008 and declining refined product demand as the recession and $4 gasoline took hold.

The relative performance of the S&P refining index to the S&P Supercomposite essentially rose and fell with this refining margin. The refining index includes Sunoco (SUN - commentary - Trade Now), Valero (VLO - commentary - Trade Now), Tesoro (TSO - commentary - Trade Now), Holly (HEP - commentary - Trade Now), Frontier Oil (FTO - commentary - Trade Now) and World Fuel Services (INT - commentary - Trade Now). Refining is not a 3-6-3 business, but the relative performance of refining stocks could be grasped by the dimmest S&L manager of yore.