Halfway through the trading day last Friday, January 16th 2009 and the market is down about 88 points. The market opened higher Friday than on the past few days due to good earnings by Cisco and bailout funds reaching Bank of America to the tune of $20 Billion, and $118 Billion in loan exposure insurance.

Despite some initial good news out of Cisco and BofA, the near-term market outlook does not look good for businesses or employees; in total, about 21,000 people were laid off from companies such as Pfizer (PFE), Mosaic (MOS), and Conoco Phillips (COP) on Friday alone. With unemployment rates still climbing, the economy isn’t getting better anytime soon and stock traders are moving money lightly in fairly wild swings.

Crude oil for the week has been down sharply. The International Information Agency said Friday morning that they weren’t expecting demand to pick up until 2010. This announcement has put further downward pressure on oil, which contrary to popular belief, is not good for the markets. Indexes struggle to have an upswing unless the energies–like oil or electricity–or financials move, because they are so heavily weighted on the indexes.

However, forward-looking gas prices could provide us with a bright spot for the markets, though not for the consumer. The last few months have brought gas to levels we haven’t seen in years, with gasoline in some areas under $1, but this could be short-lived. Oil refiners have been cutting capacity aggressively in order to stabilize the precipitous decline in Reformulated Gasoline futures and slowly but surely futures have begun trading higher. In December, oil futures were trading around $.85; today futures are back up to $1.14.

In the past few months, oil drillers and explorers such as Transocean (RIG) and Halliburton (HAL) have taken huge hits because of the drop off in the price of oil. Simple supply-side economics explain that if the costs to drill for oil in your basement are $120, you will only produce oil in your basement if it your payout is above $120. The same idea applies to refiners but the input is the crude oil and the output has to be higher in dollars than the oil is the gasoline and other refined products. From around May to October it wasn’t profitable to produce gasoline because it cost more to make it than they could sell it for. Now we are starting to see a turn in the industry as the supply of gasoline provided by refiners is being decreased as production is being cut.

Refiners make money off of crack-spreads, which is the arbitrage-the buying and selling of the same commodities in different markets–on a barrel (output) of gasoline from a barrel of crude oil (input). I’ve been tracking the refiner Tesoro (TSO), and the company recently released preliminary earnings reports for the fourth quarter 2008. In the reports, Tesoro expected per-share earnings to be between $.60 and $.75, while analysts expected earnings of $.43. The reports also stated that the company’s gross margin per barrel would be between $12.00-$12.50. This means that per barrel of oil used they are making $12.00-$12.50. For the last several months this number has been negative, which was the reason the stock fell from a 52-week high of $43.11 in February of 2008 to a 52-week low of $6.71 in November. It’s definitely a good sign that refiners like Tesoro are expecting to be back in the black.

Keep an eye on the refiners and remember that it’s all about the crack-spread.