Javier Blas: The Widening Crack Spread -- January 24, 2023

From Javier Blas, Bloomberg:

Almost unnoticed, oil refining margins have once again exploded — and that’s a problem for consumers.

The price of crude matters for Saudi Arabia, Russia and other producers. It also matters for oil refiners. But what matters for consumers is the cost of refined products. And higher refining margins mean gasoline, diesel, jet fuel and other petroleum products are becoming dearer.

Oil refineries are complex machines, capable of processing multiple streams of crude into dozens of different petroleum products. For simplicity’s sake, the industry measures refining margins using a rough calculation called the “3-2-1 crack spread”: for every three barrels of crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillates like diesel and jet fuel.

On Tuesday, the WTI 3-2-1 crack spread touched a three-month high of $42 a barrel.

If we aren’t hearing the alarm bells it’s because we’re deaf after refining margins reached eye-watering levels in 2022, when the 3-2-1 crack spread briefly surged above $60. But from a historical perspective, current margins are sky-high, as well.

Central banks need to keep an eye on them since they could be leading indicators of higher gasoline and diesel costs — and hence inflation. Take the cost of jet fuel in the wholesale market, for example. In New York harbor, it changed hands Monday at the equivalent of about $185 a barrel.

From 1985 to 2021, the WTI 3-2-1 crack spread averaged about $10.50 a barrel. Even between 2004 and 2008, during the so-called golden age of refining, the crack spread never surpassed $30. In more than three decades of data, the crack spread has only traded above its current level for 72 days — all of them in 2022, barring Monday and Tuesday this week.

Four factors explain why refining margins are rising.

One is healthy demand. Despite concerns about the impact of slower economic growth in the US and Europe, the International Energy Agency forecast that global oil demand would grow by 1.9 million barrels a day in 2023, partly boosted by China’s reopening.

Another one is that the US refining system — the world’s largest — was hit by a storm recently, reducing operating capacity and, therefore, production of petroleum products.

Moreover, refiners around the world are likely to do more maintenance this year than last, when they delayed it to cash in on record margins.

Finally, inventories of refined products, particularly middle distillates, remain low.

 -- Javier Blas, Bloomberg Opinion

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