Cracking Up - What's Driving U.S. Refiners' Sky-High Crack Spreads?

Over the past few weeks, many U.S. refiners reported even-stronger-than-expected first-quarter results, and it’s likely their good fortune will continue. Why? Despite the skyrocketing price of crude oil — refiners’ primary feedstock — the prices of the gasoline and diesel they produce have risen even more. And it’s that now-yawning gap between crude oil and refined-products prices that’s been driving refining margins — and refiners’ profits — to near-historic levels. Refining margins, like the character and capabilities of thoroughbreds like “Rich Strike” in Saturday’s amazing Kentucky Derby, are unique to each refinery because of their different sizes, equipment and crude slates (among other things), but there’s a tried-and-true way to estimate the refining sector’s general profitability, as we discuss in today’s blog on U.S. refiners’ sky-high crack spreads.

It’s been quite an earnings season for many U.S. refiners. One after another, they’ve reported first-quarter results that exceeded even Wall Street’s energy-boom-time expectations. And in each case, as you might have guessed, the improved results were fueled by sharply higher refining margins — namely, the money refiners make on each barrel of crude oil they process into gasoline, diesel, jet fuel and other products. Valero Energy and Phillips 66, for example, both said that their refining margins in the first quarter were more than double those of a year earlier, when COVID was still weighing heavily on fuel demand. PBF Energy’s margins more than tripled.

For many years now, we’ve blogged about the crack spread, which you might call a rule-of-thumb approach to estimating the profitability of the refining sector by comparing the price of crude to the prices of gasoline and diesel, the two largest outputs of a typical refinery. And there are at least a few approaches to compute the crack spread.

A common approach is to use the 3-2-1 crack spread, which represents the operation of a hypothetical refinery that makes twice as much gasoline as diesel from three barrels of crude. In other words, a 3-2-1 crack spread is the difference between the cost of three barrels of crude and the sum of two barrels of gasoline plus one barrel of diesel. We often use the 3-2-1 crack spread (and track it in RBN Spotcheck) because, back in the good ol’ days, a typical refinery produced about twice as much gasoline as diesel. But we also look at the 2-1-1 crack spread — the difference between the cost of two barrels of crude and the sum of one barrel of gasoline and one barrel of diesel — because that one-to-one gasoline-to-diesel output ratio is often a little closer to reality these days. (Or if you’re looking for more sophisticated regional margins across various grades, we’ve got those in our Refinery Billboard.)

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