Why did the 3:2:1 crack spread narrow to 55.38 this month?

The 3:2:1 crack spread is 55.38, down 13.22 over the past 30 days. That spread is the rough refining margin on a barrel of crude turned into gasoline and diesel, and a move that size in a month is worth tracing. Something on either the crude side or the product side moved, and I wanted to know which, and where the margin went.

Start with the two products. RBOB gasoline is 3.079, down 11.6% over 30 days, off a high of 3.587. ULSD diesel is 4.675, down 10.9%, off a high of 5.262. Both the fuels that make up the crack came down by roughly a tenth of their value in a month. On its own that would narrow the crack, since the crack is what refiners get for the products minus what they pay for the crude.

Then the crude side. WTI is 96.28, down 6.0% over 30 days, off a high of 105.83 and a low as far down as 68.25. So crude fell too, but at close to half the pace of the products. When the thing you sell drops by around a tenth and the thing you buy drops by closer to a sixteenth, the gap between them closes. The crack narrowed because product prices fell faster than crude did.

So the plain read holds: products led the move down, crude lagged, and the refiner's margin got pinched between them. The question is why products would fall that hard while crude held up comparatively well, because the obvious supply story points the other way.

Look at what crude was reacting to. The wire this month was full of reasons for crude to stay bid. OilPrice reported Iranian strikes on tankers in the Strait of Hormuz and a U.S. inventory draw of 8.56 million barrels for the week to October 9, with Brent at $105.48 and WTI at $97.40 at the time of writing. Ukraine kept hitting Russian refineries, and President Trump told Newsmax that striking diesel refineries is "a disgrace" that is "making the world oil price higher." Every one of those is a reason crude would resist falling. And crude did resist, down only 6.0% while the products dropped by around eleven percent each. The crude side behaved exactly as the headlines would predict. It held comparatively firm. The products did not follow it up.

Now the part that does not fit the easy supply-glut explanation. If products were cheap because the market was drowning in them, I would expect refiners to be running hard, flooding the system. They are not. U.S. refinery utilization is 16.615, down 4.1% over 30 days, off a high of 17.586. Runs came down. Fewer barrels are being turned into fuel, which normally supports product prices, not pulls them down. So the narrowing crack is not a case of refiners overproducing into a falling market. They pulled back, and the products still fell.

That points the cause at demand rather than supply. Products fell while runs fell and while crude stayed comparatively firm, which is the pattern you get when the pull on gasoline and diesel softens faster than the barrel underneath them. Diesel & Freight was the single most-covered sector over the last 14 days at 1410 items, ahead of Prices at 1201 and Refining & Markets at 1146. The freight-and-diesel story is carrying the most attention, and diesel is the product whose price gave back 10.9% off a 5.262 high. I can't prove the demand read from this data alone, but the combination of lower runs, firm crude, and softer product prices leans that way more than it leans toward oversupply.

The diesel retail-wholesale spread is 1.456, up 0.133 over the past 30 days. As the refiner's crack margin narrowed by 13.22, that margin moved downstream to the marketer and the retailer, who are selling diesel into a retail price that came down more slowly than their cost did. For a fuel retailer this has been a workable month on diesel. For the refiner the same move went the other way.

One more input that cuts across all of this. Henry Hub natural gas is 3.173, up 9.8% over 30 days, and U.S. gas storage is 3567, up 8.2% and at its 30-day high. Gas is a refinery's fuel and feedstock cost, and it rose while product prices fell. So the refiner faced a narrower crack and a higher energy bill inside the same month. That compounds the squeeze on the refining margin without touching the retail spread.

What I am sure of: the crack narrowed because gasoline and diesel fell by around eleven percent each while crude fell only 6.0%, and the lost refining margin showed up partly downstream, where the diesel retail-wholesale spread widened by 0.133 to 1.456. What I am less sure of is the root cause of the product weakness. Lower runs plus firm crude argue against a supply glut and point toward softening demand, but this data set shows me the effect more clearly than the cause. The margin is landing at the retail counter. Why the products fell is the thread I would pull next.

And that was just the data. See you tomorrow.