Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / The Great Oil Divergence Crude and Gasoline Go Separate Ways
Transcript
- Lucas: So oil is having a weird week. West Texas Intermediate crude, the U.S. benchmark, is down nearly 10 percent in the last five trading days — we're looking at around 98 dollars a barrel as of this morning. But here's the thing: gasoline futures are barely budging. Luna: That is weird. Usually crude and gasoline move together. What's causing the split? Lucas: It's a refinery story. Every spring, U.S. refineries go into heavy maintenance — they call it turnaround season. They shut down units to switch over from winter-blend gasoline to summer-blend. That creates a temporary bottleneck. Less crude gets processed, so crude inventories build up — that pushes crude prices down. Luna: And at the same time, less gasoline is being produced, so gasoline supplies tighten. So gasoline prices stay elevated or even rise. Lucas: Exactly. That's the mechanical explanation. But what makes this year interesting is the magnitude. The crude sell-off is sharper than typical for this time of year. And it's not just WTI — Brent is down about 6.4 percent in the same period, sitting around 105. Luna: Right, Brent's decline is less severe, but still notable. Is there a demand story here too? Or is it purely supply driven? Lucas: There's a bit of both. On the demand side, the latest economic data shows inflation is still sticky — the April CPI came in at 332.4, up from 330.3 in March. Core CPI is also creeping higher. That keeps the Fed in a hawkish stance, which weighs on growth expectations and therefore oil demand. Luna: So the macro backdrop is a headwind for crude. But gasoline is more insulated because of the refinery constraint. Lucas: Right. And there's another layer: distillates. Heating oil and diesel inventories have been building, which adds to the bearish sentiment for crude. But gasoline is a different molecule with a different supply chain. So the crude-gasoil spread — the crack spread — has widened significantly. Luna: That's the profit margin for refiners. So if the crack spread is wide, refiners are making good money even if crude is falling. Lucas: Exactly. And that's actually a signal that the market is functioning normally. It's not a sign of distress — it's a sign of seasonal adjustment. But it does create confusion for anyone watching headline crude prices and expecting pump prices to follow. Luna: Right. So for listeners: don't expect gas prices to drop 10 percent just because crude did. That's not how it works this time of year. Lucas: Not at all. In fact, the AAA national average for regular gasoline has actually ticked up a couple cents over the past week. That's consistent with the refinery turnaround story. Luna: So what's the forward look? When does this divergence resolve? Lucas: Usually by mid-June the bulk of maintenance is done, and refineries ramp up runs to meet summer driving demand. At that point, crude demand picks back up, and gasoline supply increases. The crack spread narrows and the two prices start moving together again. But it depends on how quickly refineries return and whether there are any unplanned outages. Luna: And of course, geopolitical risk is always lurking. You have Iran enrichment headlines, Cuba tensions — those could shift crude supply expectations in a hurry. Lucas: Absolutely. The Iran story this morning — reports that they want to keep enriched uranium inside the country — that adds a risk premium back into Brent. WTI is less exposed because it's landlocked, but Brent sets the tone globally. So even though crude is down this week, the floor might be higher than the purely mechanical picture suggests. Luna: So the divergence we're seeing is partly seasonal mechanics and partly a tug of war between macro headwinds and geopolitical tailwinds. Lucas: That's a good summary. And I think the key takeaway for our listeners is: when you see a big move in crude, don't assume gasoline or heating oil will follow in lockstep. Look at the specific part of the barrel. The market is not one monolithic thing — it's a set of related but distinct markets, each with its own supply-demand dynamics. Luna: And for inflation watchers, this matters. The breakeven inflation rate — the 10-year breakeven — has actually fallen from 2.44 to 2.39 in the last day. That suggests the bond market is seeing less long-term inflation pressure, partly because crude is falling. Lucas: Right. But if gasoline stays elevated, that's a direct hit to consumers' wallets. And the CPI data we got for April showed energy was a key component. So the divergence complicates the inflation narrative. The headline might look better if crude keeps sliding, but the actual experience at the pump might not improve as much. Luna: So what do you watch next? What's the signal that this divergence is ending? Lucas: I'm watching the weekly EIA inventory reports. Specifically, I want to see crude inventories stop building and start drawing — that signals refineries are coming back online. Also, watch the crack spread. When it starts to narrow, that's the market saying the bottleneck is clearing. Luna: And for listeners who want to track this themselves, the EIA releases its weekly petroleum status report every Wednesday at 10:30 a.m. Eastern. That's the key data point. Lucas: Exactly. So to wrap up: crude is down sharply this week, but don't pop the champagne at the pump just yet. The refinery turnaround is creating a temporary disconnect. By June, we'll have a clearer picture of whether this is just seasonal noise or something more structural. Luna: And in the meantime, if you're trading commodities or just trying to understand your energy bill, remember to look at the specific product, not just the headline crude price. Lucas: Good advice. That's all for this episode of The Commodities Economy. We'll be back next week with another angle on the raw material markets that shape the global economy. Luna: Thanks for listening, everyone.