Cracking Up (Again)
Refining margins are rapidly rising anew, threatening a repeat of last year’s historic crack spread crisis and already creating deeply unwelcome global inflationary pressure.
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Refined product crack spreads (i.e., margin) are rising, threatening a replay of last year’s historic price levels when we were spending nearly $200/bbl equivalent, before taxes, to fill up the family car.
Today, there are three important factors to watch closely as these markets develop and (hopefully) rebalance: the reversal in Chinese fuel exports, scorching hot temperatures reducing effective refining capacity, and a broad reacceleration in demand growth.
Low observable global inventories of diesel, gasoil, jet fuel, and, to a lesser extent, gasoline do appear to justify the higher than normal crack spreads and highlight how close we remain to the levels that would propel prices much higher.
The prices of key refined petroleum products—like diesel, jet fuel, and gasoline—are surging and this has everyone on high alert given last year’s historic refining sector crisis. While we aren’t yet back to last year’s crisis highs, it’s important to stress that these refining margins are not normal: diesel crack spreads today have rallied back to their highest level in history (excluding last year). At their peak last year, the combination of sky-high crude prices and a historic blowout in gasoline and diesel crack spreads meant that you and I were spending, before taxes, nearly $200/bbl equivalent to fill up the family car.
Renewed elevation in current product cracks highlight that the sector remains far from healed and vulnerable to further shocks, keeping a typically staid side of the oil market concerningly interesting. The primary drivers of this latest tightening appear to be the reversal of many of the moves that helped finally break previously crisis-level crack spreads last year. Specifically, the combination of stronger end-user demand, weaker Chinese exports, and additional weather-related constraints on effective refining capacity in key regions. While still nascent today, a true repeat of last year’s debilitating refined product volatility would place a tremendous drag on a cautiously reaccelerating global economy.