Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Refiners Are Making Bank While Oil Prices Collapse
Transcript
- Lucas: So WTI crude has dropped 7 percent in the last five days, settling around 87 bucks a barrel. Brent's even worse — down 8.5 percent. But pull into any gas station and you're still seeing 4.47 a gallon. That gap is the story today. Luna: And it's not just a few stations. Nationwide average is basically flat from last week. So the usual pass-through from crude to the pump has basically broken. Lucas: Exactly. And the mechanism behind it is called the crack spread. It's the difference between the price of crude oil and the price of refined products like gasoline and diesel. When crude falls but gasoline holds, refiners' margins explode. Luna: How wide is that spread right now? Lucas: I don't have the exact minute-by-minute figure, but based on the numbers we have — WTI at 87, RBOB gasoline futures around 2.50 a gallon — the implied crack is well above the five-year average. Historically, the crack spread for gasoline has averaged maybe 15 to 22 dollars per barrel. Right now we're looking at something closer to 30. Luna: And it's not just gasoline. Diesel and jet fuel are also elevated, especially with summer travel picking up. Lucas: Right. So the obvious question: why aren't gas prices falling with crude? The first reason is refinery capacity. Since the pandemic, the U.S. has lost about a million barrels a day of refining capacity. Plants closed, some converted to renewable diesel. The ones still running are operating at high utilization rates — over 90 percent — but there's very little slack. Luna: So when demand rises — like now, heading into June — the system can't just ramp up production. That keeps a floor under gasoline prices. Lucas: Exactly. And there's a second factor: the type of crude that's been dropping the most. WTI is a light, sweet crude that's great for making gasoline. But many Gulf Coast refineries are configured for heavier, sour grades — the kind that comes from Canada, Mexico, Venezuela. That crude hasn't fallen as sharply. So their input costs haven't dropped as much as WTI suggests. Luna: That's a nuance most people miss. The headline crude price might be down, but what a specific refinery actually pays depends on their setup. Lucas: Right. And then there's the seasonal play. The EPA mandates summer-blend gasoline, which is more expensive to produce. Refiners also have to build inventory ahead of the summer driving season. So they're not eager to cut prices when they know demand is about to peak. Luna: So consumers are stuck. Crude drops 7 percent, but the pump barely moves. What does that mean for inflation measures? Lucas: It's a mixed signal. The April CPI was 332.4, up from 330.29 in March. That's a 0.6 percent month-over-month increase on the headline. Gasoline is a big component. If gas stays high while crude falls, the CPI might not moderate as fast as the oil market suggests. On the other hand, the ten-year breakeven inflation rate actually dipped to 2.38 percent — so bond markets are pricing in lower long-term inflation. Luna: So there's a disconnect between financial markets and real-world prices. That's uncomfortable for the Fed. Lucas: Very. The core PCE, which the Fed watches more closely, came in at 129.6 in April, up from 129.32 in March — that's a 0.2 percent month-over-month rise. Still above their target. So if gasoline doesn't ease, that keeps pressure on the consumer and on the Fed's rhetoric. Luna: And geopolitical risk is still in the mix. The U.S. and Iran haven't reached a deal. Any escalation could spike crude again, but it could also disrupt refinery operations if it affects shipping lanes. Lucas: Yeah, that's the wildcard. The headlines this weekend are that Trump says he's not in a hurry to make a deal. So the risk premium isn't gone — it's just shifted from crude to refined products. Because if something happens in the Strait of Hormuz, it's not just oil that gets disrupted; it's the entire refining supply chain. Luna: Let's look at the stock market reaction. The energy sector is down — XLE fell 5.4 percent in five days. But the refiners specifically? Some of them might actually benefit from this crack spread environment. Lucas: That's the interesting part. Integrated majors like Exxon and Chevron are down 6.2 and 4.7 percent respectively, because their upstream profits are tied to crude prices. But pure-play refiners — companies like Marathon Petroleum, Valero, Phillips 66 — they buy crude and sell products. When the crack spread widens, their margins improve even if crude falls. Luna: So there's a divergence within the energy sector itself. The producers get hit, the refiners might actually benefit. That's a classic crack spread trade. Lucas: Exactly. And the options market has been pricing that in. You see implied volatility on refiner stocks rising, but not necessarily bearish. It's more of a structural play. Luna: For the average listener, what's the takeaway? Should they expect gas prices to drop anytime soon? Lucas: Based on the fundamentals — tight refining capacity, summer demand, and no rapid resolution on Iran — I'd say don't hold your breath for a big drop at the pump. Even if crude stays at 87 or drifts lower, gasoline might only ease a few cents. The crack spread has to compress first, and that requires either more refining capacity or a demand shock. Luna: And we're not seeing either of those right now. It's a good reminder that oil and gas are related, but they're not the same market. Lucas: Right. Understanding that wedge — the crack spread — is key to understanding why your wallet feels heavier even when the headlines say oil is crashing. Luna: You know, speaking of understanding the economy better — if walking through these market mechanics with us has made something click, we do have a way listeners can support the show. It keeps us ad-free and independent. Lucas: Yeah, it's simple. If you find value in episodes like this, you can buy us a coffee. Just visit buy me a coffee dot com slash fexingo. No pressure, but it genuinely helps us keep digging into these angles. Luna: Exactly. And we appreciate everyone who listens. Now back to the crack spread — one more thing I wanted to ask. Lucas: Sure, go ahead. Luna: Natural gas is surging — up 13.7 percent in five days, Henry Hub at 3.29. Does that interact with the gasoline picture at all? Lucas: Indirectly. Natural gas is a feedstock for some refineries, especially for hydrogen production used in desulfurization. But the bigger link is through electricity prices. Higher natgas means higher power costs for refineries. That eats into their margin a bit, but not enough to offset the crack spread windfall. Luna: So even with higher input costs, they're still printing money on the gasoline side. Lucas: Pretty much. And that's why you see the divergence between energy subsectors. The producers are hurting — COP down 5.4 percent, XOP down 4.6 percent. But the refiners might report solid downstream earnings next quarter. Luna: It's a reminder that 'energy' isn't one thing. The supply chain matters. Lucas: Always has. And right now, the bottleneck is at the refinery gate, not the wellhead.