Refining margins stay wide as crack spreads run hot, keeping rack costs firm for jobbers

Refiners are pulling in fat margins right now, and a jobber should be watching those margins closely. The Financial Post is calling it "Crackageddon," with Canadian refineries raking in the spread between crude and finished product. When the crack runs this wide, the refiner keeps the money, and the marketer buying at the rack pays for it.

What a wide crack means at the rack

The crack spread is the gap between what a refiner pays for crude and what it gets for gasoline and diesel. The 3:2:1 version prices three barrels of crude against two of gasoline and one of distillate. When that gap widens, refining is the profitable link in the chain, and the pump and the rack stay firm even if crude eases.

For a jobber, the practical read is simple. Your cost is tied to the rack, and the rack is tracking product, not crude. A soft crude tape does not hand you cheaper gallons when refiners are holding margin. You could see the screen for WTI drop and still buy diesel at a price that barely moves.

Branded versus unbranded

Wide margins usually mean refiners want to run hard, which is good for supply. Fuller runs mean more product looking for a home, and that tends to loosen the unbranded market first. An unbranded buyer may find the discount to branded widening when refiners are chasing volume to capture the crack.

Branded jobbers are more locked in. Your rack is your supplier's rack plus the brand differential, so a refiner earning a strong crack has less reason to give the branded channel a break. If you run both books, this is the stretch where the unbranded side may pencil out better on the margin, supply permitting.

The Canadian angle

Canadian refineries doing well matters to a US operator only where it touches US supply. Northern-tier jobbers in PADD 2 and the Northeast pull product that moves across the border, so strong Canadian refining economics can keep those barrels flowing rather than pulling them offshore. A refiner making money on the crack keeps the units running, and running units feed terminals. What matters to a US operator is whether those units keep running, not the profit line on a Canadian income statement.

What to watch

Watch the crack spread itself over the next week, because it sets whether the rack stays firm or softens. If refiners keep running to capture margin, product supply should hold up and the unbranded discount may widen. If the crack narrows, rack costs could ease off product and follow crude down. Keep an eye on the branded-to-unbranded gap at your terminals for the first sign either way.