The Oil and Gas industry is usually divided into three major sectors: upstream, midstream, and downstream. The downstream sector is the refining of petroleum crude oil and the processing and purifying of raw natural gas, as well as the marketing and distribution of products derived from crude oil and natural gas. The downstream sector reaches consumers through products such as gasoline or petrol, kerosene, jet fuel, diesel oil, heating oil, fuel oils, lubricants, waxes, asphalt, natural gas, and liquefied petroleum gas (LPG) as well as hundreds of petrochemicals.
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Downstream sector is mainly comprised of refineries, the number of refineries are fairly static. To build a new refinery is a huge investment ( 1 Billion US$ +) and takes long to setup ( 3 – 5 years ) There are about 180 refinieries in the US and the number has been growing slowly. In fact there was no new refinery build in the US for the best part of 30 years. Refineries operate 24 x 365 and require vast amount of land and manpower.
Special Benefit: Investing in Downstream firms
Share prices of firms in the Downstream segment are less directly linked to the current Oil Price compared to Upstream firms. Lower Crude prices are passed onto refined products with delay of a few months , as there are usually large storage quantities that are used for refining crude to petrol first. Events that impact Downstream stocks are mostly natural disasters that cause shut down of refineries and large environmental damage. Downstream stocks offer smaller dividends then midstream firms and are less volatile then upstream firms.
If you are interested to get the full insight on the relationship between Crude Oil Prices and Downstream performance, there is a detailed report by McKinsey Energy Insights Impact of low crude prices on refining – McKinsey
The Oil Investment report scouts the best Downstream sector stocks for you.