Oil prices extended their decline on Tuesday, slipping to new multiyear lows on fears that Saudi Arabia, the world's biggest exporter of oil and other related liquids, could be gearing up to compete with U.S. shale oil. West Texas Intermediate crude oil futures are hovering around $77 a barrel, down from $80 a barrel when markets closed on Friday.
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The Saudi kingdom has reduced its selling price of oil to the U.S., while raising prices in some of the other regions, such as China. The cheaper imported prices are putting even more pressure on domestic oil prices. Cheaper oil means refiners can capture higher margins.
The refiners buy the crude oil and refine it into other products, like gasoline. Usually, gasoline prices do not fall as quickly, or as dramatically, as crude. For instance, over the last 12 months, the average weekly gasoline price in the U.S. has fallen by around 8.3%, as compared to 18% decline in WTI crude futures.
The widening split between prices for crude and refined products allows refiners, such as Valero, to capture higher profits. Deteriorating crude prices lower their input cost, as gasoline prices stay relatively strong.
This was evident in Valero's third quarter results, released earlier today, in which the world's largest independent refiner increased its income from just 57 cents a share last year to $2 a share, easily beating the market's expectations of $1.58 a share, according to data compiled by Thomson Reuters.
The strong performance was driven by an increase in throughput volumes as well as strong gasoline margins in most of the regions.
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