Refiners Hold Aces in '06 Oil Sweepstakes

Crippled by last fall's hurricanes and facing the prospect of more storms this year, U.S. petroleum refiners have struggled to reopen and boost production.

And yet, refiners see another year of record profits on the horizon, boosted by sky-high gasoline prices and tight new fuel standards.

Wall Street appears to agree. This year, analysts have increased their earnings estimates for nearly all independent refiners. Investors have followed and share prices have risen by as much as 59% since January.

"Refiners could counterfeit money, but it wouldn't be nearly as profitable," says Tom Kloza, publisher of the Oil Price Information Service in Wall, N.J.

A perfect storm of sorts is expected to boost this year's earnings. Aside from the usual switch to cleaner gasoline blends in the summer, refiners had to pay out billions of dollars to meet strict regulations for gasoline and diesel. These changes, combined with limited capacity -- some refiners are still battling to return to full production following Hurricanes Katrina and Rita -- are driving up wholesale gasoline prices, tightening supplies and padding refiners' profit margins.

Independent refiners, unlike most major oil companies that drill and refine crude, earn all of their money from refining. They make money when they can sell refined products -- not only gasoline, but other products like propane and jet fuel -- for more than a barrel of crude. Despite higher oil prices, their profit margin, or "crack spread," has nearly tripled over the past six months, to $17.55 a barrel.

Although oil prices have climbed 20% over the past six months, prices for refined products have risen more. That increase, and the ability to process crude that is high in sulfur, has cemented refiners' profits. Although high-sulfur crude is more complicated and costly to process, it is more abundant and costs less. For instance, Mexican Maya crude, which has high levels of sulfur, sells for $14 less per barrel than West Texas Intermediate.