Why has the 3:2:1 crack spread widened to 57.56 in a month?

The 3:2:1 crack spread is 57.56, up 9.94 over the past thirty days. Crude fell hard over that same month. A spread that widens while its main input collapses is worth pulling apart, because the answer decides who has been earning money in fuel since June and who has been watching it pass by.

Start with crude. WTI is 72.62, down 19.3% over thirty days, with a high of 112.94 in that window and a low of 68.25. Brent is 76.93, down 17.4%, with a high of 118.34. Those are war prices unwinding. The Strait of Hormuz risk premium that pushed Brent above 118 has come out of the market since the United States and Iran signed their memorandum of understanding in the middle of June, and OilPrice reported this week that benchmarks fell back to pre-war levels and lower before the latest bounce. Crude is the denominator in a refining margin. When it drops that far, the margin widens on its own unless products drop just as fast.

They did not. Retail diesel is 4.578, down 12.1% over thirty days. Retail gasoline is 3.911, down 8.6%. RBOB futures are 2.8585, down 8.1%. Every one of those is a smaller percentage decline than the 19.3% drop in WTI. Products came down. They came down more slowly, and slower is the whole mechanism. The crack spread is the price of the barrel of products minus the price of the barrel of crude that made them, so a fast crude decline and a slow product decline pushes it up without anyone raising a posted price anywhere.

The obvious read is that this is arithmetic and nothing more. Crude fell, products lagged the way they always lag, the spread widened, and it will close as products catch down. Rack prices follow futures with a delay. Retail follows rack with a longer one. That story is clean and it is partly true, and the reporting says it is not the whole thing.

The reporting adds a second cause. OilPrice puts refining margins for gasoline and diesel at new record highs, European diesel margins included, after the re-escalation in the Middle East, Russia's ban on diesel exports, and falling global fuel inventories. Their read is that the product spread over crude says fuel markets are still very tight, even with millions of barrels of crude moving out of the Strait of Hormuz in recent weeks. The crude market is loose and the product market is not.

The physical side supports it. Drones struck the Ilsky refinery in the Krasnodar region and started a fire, with no casualties reported. A fire was recorded again at the Moscow Oil Refinery after a drone attack. Blazes broke out near Russian oil refineries and authorities issued alerts. Russia has banned diesel exports. Refining capacity is the thing being taken offline, not crude production, and a barrel of crude cannot become a gallon of diesel without a working unit to turn it. Crude supply has recovered while the machinery that converts it has been damaged and its output restricted.

So the spread has two engines. One is mechanical, crude falling 19.3% while RBOB falls 8.1%, and that engine unwinds over time as products settle. The other is physical, and it is refining capacity, and it unwinds when the units come back.

Where the margin is landing is the part I checked next, and it is the part that surprised me. The retail diesel to wholesale spread, the money a marketer keeps between what he pays at the rack and what he charges at the pump, is 1.28, down 0.33 over thirty days. It narrowed while the refining margin widened. The two numbers went opposite directions in the same month. The barrel is earning more in the refining step and less in the last step to the customer, which is what happens when wholesale product prices hold up while retail comes off. Diesel retail is down 12.1% over the month. The rack did not fall as far.

Refiners are having a good run and the reason is legible. They bought crude at 72.62 that cost far more a month ago, they are selling into a product market that global capacity outages have kept tight, and OilPrice puts their margins at record highs. They also carried the risk when Brent was 118 and their input cost was working against them. The marketers moving that fuel to the pump are working with a thinner spread than they had thirty days ago, and they carry the volume risk either way. Both are doing the same job they were doing in June under a different set of prices.

What I am sure of is the direction and the location. The spread widened mostly because crude fell far faster than products, and the reporting adds a real second cause in Russian refinery outages and the diesel export ban. The margin is landing in the refining step, and the retail diesel spread is the number that shows it moving away from the street.

How long this lasts is the open question. Products catching down closes the crude-driven part of the widening. Nothing closes the capacity-driven part until the units come back, and I have no basis for saying when that is. The IEA warned Friday that re-escalation of U.S. and Iran hostilities could flip the outlook for an oil market surplus next year, which would push crude back up under a product market that is already tight. If a marketer is budgeting on 57.56 holding, I would not. Budgeting on it collapsing next week is no safer.

And that was just the data. See you tomorrow.