Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / The Oil Price Disconnect Between Crude and Refined Fuels
Transcript
- Lucas: So crude oil is basically flat over the past week — Brent around 97 and change — but if you look at what's happening downstream, the price of diesel and gasoline is telling a very different story. Luna: You mean the crack spread? I've seen some numbers suggesting refiners are making bank right now. Lucas: Exactly. The 3-2-1 crack spread — that's a rough measure of refining margins based on three barrels of crude yielding two barrels of gasoline and one of diesel — has blown out to about $45 a barrel. That's the highest since the summer of 2022, when we had that post-invasion spike. Luna: Wow. So refiners are printing money, but the crude itself isn't moving. That's a pretty big disconnect. Lucas: It is. And it's not just a blip. U.S. distillate inventories — that's diesel and heating oil — are about 12 percent below the five-year average for this time of year. Meanwhile, we're heading into summer driving season, gasoline demand picks up, and refineries are already running near capacity. Luna: So why can't they just ramp up production? Is it a capacity issue or something else? Lucas: Both. A lot of refineries globally shut down during the pandemic, and some never came back. The ones that did are running flat out. Plus, we've had a bunch of unplanned outages in Europe and Asia over the past month. That's tightened supply just as demand is recovering. Luna: And then there's the IMO 2020 thing, right? The shift to low-sulfur marine fuels? That changed the refining equation permanently. Lucas: Right. That regulation forced shippers to switch to lower-sulfur fuel, which in turn requires more complex refining — basically more diesel-like fuel. So the demand for distillates got a structural boost just as the refining system was already strained. Luna: And that's not going away. Meanwhile, the trucking industry is getting squeezed. I read that spot diesel prices at the pump are up like 20 cents a gallon just in the last month. Lucas: Yeah, and airlines are feeling it too. Jet fuel is essentially a middle distillate, same as diesel. So the same supply tightness that's pushing up diesel is also hitting jet fuel. That's going to show up in ticket prices eventually. Luna: Which is ironic because the headline crude price looks so calm. If you're just watching Brent, you'd think nothing is happening. Lucas: Exactly. And that's the core of the story this week. The crude market is being held down by a few things — rising OPEC+ production, concerns about demand in China, the stronger dollar. But the refined product market is its own beast. Luna: Let's talk about the regional dimension. Europe is particularly tight, right? Lucas: Yeah. Europe has lost a lot of refining capacity since the war in Ukraine. Russian diesel used to be a huge part of the supply picture. Now that's largely cut off, and European refineries can't fill the gap. So they're importing diesel from the U.S., the Middle East, India. But all those sources are constrained too. Luna: And that's why the crack spread is so high. It's not just a U.S. story. Lucas: Right. Asian markets are also tight. South Korea, which is a major refining hub, has had several units down for maintenance. That's pulled supply out of the global pool just as demand is strong. Luna: So what does this mean for the average consumer? Obviously diesel prices feed into everything — trucking, shipping, construction. Lucas: It means higher costs for goods, for sure. But the timing is interesting. We're heading into an election year in the U.S., and high fuel prices are always a political issue. The administration has been drawing down the Strategic Petroleum Reserve to try to moderate crude prices, but that doesn't directly affect diesel or gasoline. Luna: Right, because the SPR is crude, not refined products. So they'd have to release refined products, which they've done in the past, but it's a much smaller reserve. Lucas: Exactly. The Northeast Home Heating Oil Reserve is only 1 million barrels. That's nothing compared to daily consumption. So they don't have many tools to directly address this. Luna: One more thing — the crack spread is also signaling something about the global economy, isn't it? Lucas: Yeah, a high crack spread usually means demand for refined products is strong relative to crude supply. That can be a sign of economic activity picking up, especially in manufacturing and transportation. But it can also be a supply-driven squeeze, which is what we're seeing now. So it's not an unambiguous bullish signal for the economy. Luna: And speaking of signals that something is working — if you find these market breakdowns useful, and you want to help keep the show ad-free, listener support is what makes that possible. You can find us at buymeacoffee.com/fexingo. Lucas: Yeah, it's a small thing that goes a long way. So back to the crack spread — one key thing to watch in the coming weeks is whether the spread starts to narrow. That would happen if crude catches up, or if refineries get back online and products ease. Luna: So you're watching refinery utilization rates and outage reports? Lucas: Exactly. And also the EIA inventory reports every Wednesday. A big build in distillates would be the first sign that the squeeze is easing. So far this spring, we've seen more draws than builds. Luna: What about the other side — could crude itself rally and close the gap? With the Middle East tensions this morning, oil is up 3 percent. Lucas: That's possible. If crude spikes on geopolitical risk, the crack spread would narrow because the denominator goes up. But that would mean higher prices across the board — not necessarily a good thing for consumers. The ideal outcome would be more refining capacity coming online, but that takes years. Luna: So we're stuck with a structurally tight refined product market for a while. Lucas: That's my read. The crack spread is telling us something real about the state of global refining. And until we see meaningful new capacity — which could be 2027 or later — this dynamic is going to keep showing up in diesel and gasoline prices, even if crude itself doesn't move much. Luna: Good to have a lens for it. Next time I see a headline that says 'oil prices stable,' I'll remember to check what's happening downstream. Lucas: Exactly. The headline can be misleading. The real story is often in the products.