Diesel margins jump as Gulf Coast crack spread hits $65 a barrel, more than double last year
The USGC 3-2-1 crack spread averaged $65 a barrel in August, more than two-and-a-half times its year-ago level, and the surge came almost entirely from diesel. Middle distillate cracks hit record highs this week. For anyone buying wholesale product off the rack, that is the number that matters, because a fat refining margin on diesel does not stay at the refinery. It rides straight through to your rack price.
Two things are driving it, and neither is a US story on its face. Russia banned diesel exports while Ukrainian drones keep hitting its refineries, pulling barrels out of the global pool. The re-escalation around the Strait of Hormuz has erased hopes of a quick recovery in Middle East product flows, ING commodities strategists Warren Patterson and Ewa Manthey wrote this week. Tight middle distillate markets abroad pull US export barrels overseas, and that leaves less for the domestic rack.
What it means for the rack
Jobbers on unbranded supply feel it first. Spot rack moves with the margin; a branded contract lags. If you are running tight on days of supply, this is the setup where a terminal goes into allocation and the branded-versus-unbranded spread flips in favor of whoever locked in a contract.
No allocation has been called yet on the US Gulf. The signal to watch is the diesel basis at your terminal against the screen, not the CNBC crude headline.
Hormuz shipping thins out
Tanker traffic through the Strait of Hormuz is running below normal. Kpler counted only four crossings Tuesday against a ten-day average of 13, per Reuters. Windward reported four tankers entering the strait, two of them in dark mode, and three exiting, one in dark mode. US Energy Secretary Chris Wright put the flow at 17 million barrels earlier this week.
Dark-mode transits and thin crossings tell you owners are nervous about the strait, and nervous owners charge more freight. That cost lands in the landed price of anything moving out of the Gulf, which keeps a floor under distillate cracks even if the shooting pauses.
What to watch
The Russian export ban is the swing factor. If Moscow lets diesel flow again, the global squeeze could ease and Gulf Coast cracks may come off these highs. If the refinery strikes keep the ban in place, tight distillate could hold into the fall.
Watch your terminal's diesel basis daily, watch whether any USGC rack goes to allocation, and watch the tanker count through Hormuz. A recovery there would be the first sign the product squeeze is loosening.