It's great to be a refiner in 2007

It's still a great time to be a refiner, based on AG Edwards' latest weekly survey of refining margins. But it's not quite as good as it used to be, and it's not a particularly strong business now in Europe.

Measuring margins as a third-party is a particularly tricky activity, because analysts can argue day and night about how to do it. The most widely watched margin is the so-called 3-2-1 margin, which is arrived at by taking the price of three barrels of crude on the NYMEX, and subtracting that figure from taking two barrels of NYMEX gasoline (which you get by taking the price and multiplying by 42, the number of gallons in a barrel) plus one barrel of NYMEX heating oil.

The list of reasons why it's a lousy indicator is that you're comparing like time periods -- for example, July crude to July products -- when in the real world, crude delivered in July would produce products that might get delivered a month or two later. A second key reason is that NYMEX crude at Cushing, Oklahoma, would virtually never be refined to produce products that would end up in New York harbor, the delivery point for NYMEX gasoline and heating oil.

But the 3-2-1 is easily calculated; you can literally do it on the back of an envelope, to steal an old phrase. And with the Merc prices so visible, now 24 hours per day, you can figure it out in seconds. So it persists.

AG Edwards' methodology is proprietary, but it has shown a decline in US margins for four consecutive weeks, from $31.31 per barrel for the week ended May 18, to $21.21 last week. Singapore margins slipped for four weeks, from $10.73 to $8.14 before rebounding last week to $8.60; European margins remain depressed, but are higher at $4.91; according to AG Edwards, they bottomed last week at $3.70 but were as low as $1.42 at the beginning of April. No surprise then that gasoline exports to the US from Europe were surging just around then.

What all of this means to the consumer is that retail gasoline prices for now appear to have stabilized even as crude remains strong. And for US refiners, last week's margins have been surpassed in only 16 weeks in the last five years, dating back to the beginning of 2002, including the weeks following hurricanes Katrina and Rita. So these do remain the best of times for refiners.