Cracking Up, Part 2 - Will High Crack Spreads Be Enough to Balance Refined Products Markets?

U.S. diesel inventories are at their lowest level for May since 2000 and East Coast stocks recently hit their lowest mark for any week or month since the EIA started tracking them in 1990. Crack spreads for diesel — and, more recently, for gasoline — have gone parabolic, giving refiners the strongest financial signal ever to produce more diesel and gasoline as we enter the summer travel season. More jet fuel too. The problem is, U.S. refineries already are running flat-out. And Europe? It’s facing big cuts in crude oil and refined-products imports from Russia as well as much higher prices for — and possible shortages of — oil and natural gas, the latter being the primary fuel for operating refinery hydrocrackers, which upgrade low-quality heavy gas-oils into high-quality diesel, gasoline and jet. It’s a mess, and not easily fixable, as we discuss in today’s RBN blog.

U.S. and global energy markets have always had challenges to deal with — nothing so far-reaching, multifaceted and interdependent can run as reliably and smoothly as a Swiss watch, whose gears and springs operate within a glass-and-gold vacuum. But it would be hard to find a time when energy markets are in as much disarray as they are today. The COVID pandemic, a precipitous economic slowdown (and partial rebound), a nascent energy transition, Russia’s war on Ukraine, and China’s big-city lockdowns, among other things, have combined to wreak havoc, with the most significant effect being supply/demand imbalances that have propelled prices for crude oil and refined products (and natural gas) sharply higher.

Markets generally fix themselves. We’ve all heard this economic truism: “The cure for high prices is high prices.” While that may generally be true — when widget demand and prices soar, producers ramp up production to take advantage of the situation, and increased supply brings prices back to earth — the truism doesn’t always hold up, especially in the short term, particularly when things get complicated. And things are very complicated today. Demand for crude oil from Russia, a leading producer, is off sharply — the U.S., its allies and others won’t touch the stuff, leaving Russia’s reduced output to be sold at a discount to those who will. Oil production in the rest of the world is up only marginally, however, partly because many countries can’t increase their production much and partly because those that can have learned that ramping up production quickly can cause prices to plummet.

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