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It has been a tough year for oil producers, but a great one for refiners. The refining stocks may continue their rally, which would be great for Market Vectors Oil Refiners ETF (CRAK) – the only fund that gives investors pure-play exposure to global refining. The fund’s growth will be driven by strong performance of its underling companies – Valero, Marathon Petroleum, Phillips 66 and Reliance Industries. It has been one of the toughest years ever for oil producers who have posted record losses and seen billions wiped from their market values, thanks to more than 50% drop in oil prices in the last 18 months. But it has been a great year for refiners who have benefited from cheap oil which has lowered their input cost and strong demand of refined gasoline and diesel. The oil producers, as represented by the SPDR S&P Oil & Gas E&P ETF (NYSEARCA: XOP ), have seen their shares drop by more than 38% this year. On the other hand, the nation’s leading refiners Valero (NYSE: VLO ), Phillips 66 (NYSE: PSX ), Marathon Petroleum (NYSE: MPC ) and Tesoro (NYSE: TSO ) have seen their stocks rise significantly this year, with Valero in the lead on the back of 45% gain. These refiners will likely continue their rally in 2016, which is great for Market Vectors Oil Refiners ETF (NYSEARCA: CRAK ). CRAK is the first and only ETF in the U.S. that gives investors pure-play exposure to the global refining sector. The fund tracks the performance of Market Vectors Global Oil Refiners Index which includes those energy companies that get at least half of their revenues from crude oil refining business. The fund’s top holding is Valero, the world’s biggest refiner in terms of capacity, followed by Phillips 66 and Marathon Petroleum. Valero has not only grown its per share earnings by more than 50% in the first nine-months of this year as compared to last year, but also generated strong levels of cash flow. Despite peak levels of capital spending and significantly boosting payouts to shareholders through 80% increase in dividends and more than 100% growth in buybacks, the company is still generating strong free cash flows. Some of the recently completed projects — such as McKee refinery CDU capacity expansion, Port Arthur hydrocracker expansion, crude topping units — as well as some of the new projects will drive Valero’s earnings growth in the coming quarters. Similarly, Marathon Petroleum has also reported strong earnings growth while boosting payouts to shareholders. The company is also poised to benefit from persistent weakness in oil prices and its master limited partnership MPLX LP (NYSE: MPLX ) will play a crucial role in driving future growth following the takeover of MarkWest Energy (NYSE: MWE ). Phillips 66, on the other hand, is not eyeing any growth in the refining business, which has driven a majority of its earnings. Rather, the company is leveraging its strength as the second largest U.S. refiner in terms of capacity to expand its non-refining operations, such as the midstream segment, which will fuel its growth in the coming years. The three companies, which alone constitute a little less than a quarter of the fund’s net assets, have performed strongly this year and are positioned to continue growing their bottom-line on the back of the soft oil price environment. As a reminder, the WTI oil prices are currently hovering near multi-year lows of around $35 a barrel. And prices may remain under pressure due to the looming threat of a surge in crude supplies from Iran as U.S. sanctions are lifted over the next few months coupled with the risk of world running out of storage capacity by next spring. Cheap oil and strong gasoline demand around the world could make 2016 another great year for refiners, despite the anticipated slow down in margin growth due to moderate gasoline demand growth in 2016 as compared to 2015. The U.S. refiners in particular will lose some of the cost advantage due to the anticipated decline in WTI-Brent spread following the end of crude export ban, but this will be partly offset by the proposed tax break. The U.S. refiners, however, will continue to enjoy the competitive advantage over their international peers due to the unparalleled economies of scale associated with the largest and one of the most technologically advanced refining systems in the world. In addition to U.S based companies, CRAK also gives investors exposure to major non-U.S. refiners. This includes India’s Reliance Industries ( OTC:RELEY ), controlled by the famed billionaire Mukesh Ambani and owner of the world’s largest refining complex. Like its U.S. based peers, Reliance has been benefiting from cheap oil prices which have allowed to post some of its highest profits over the last several years. The company is spending more than $18 billion to develop refining, petrochemical and downstream projects. Analysts believe that the company can continue growing its bottom-line at strong double-digit rates over the next three years. Reliance Industries is the fourth largest holding in CRAK and represents 6.46% of the fund’s net assets. Other major non-U.S. companies in CRAK include Japan’s JX Holdings ( OTCPK:JXHLY ), South Korea’s SK Energy, Caltex Australia ( OTC:CTXAY ) and Potugal’s Galp Energia ( OTCPK:GLPEY ). Together, the non-U.S. companies represent 56% of the fund. The strong performance of its underlying companies in the cheap oil price environment could drive CRAK’s rally in 2016. The risk here is that the fund is just four months old and therefore has little track record to gauge its performance. It has just $3.9 million of net assets under management and comes with a gross expense ratio, including management fee, of 0.64%. This compares against other better established funds that Van Eck Global, which offers the Market Vector funds, is known for – such as the $1.1 billion Market Vectors Oil Services ETF (NYSEARCA: OIH ) with gross expense ratio of 0.39%. But while most of the oil and gas funds that give investors exposure to the broader energy sector or a specific energy industry may continue to struggle in the downturn, CRAK is the only fund that is a pure-play on refiners and is positioned to outperform its bigger rivals. It could be worth the risk. Scalper1 News
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