RISING TIDES
Observations from the IMC Research Process

A Crude Reality

The oil market is under pressure at both ends: crude supply is tight, and so is the capacity to refine it.

• There’s a bottleneck between crude oil and your gas tank. Years of refinery closures and limited new capacity have left less room to turn crude into gasoline, diesel and jet fuel. Now disruptions in the Strait of Hormuz and attacks on Saudi energy infrastructure are putting even more pressure on the system, while inventories of key refined products are unusually low. More US production helps, but it can’t solve a shortage of the right crude in the right place—or the capacity needed to turn it into finished fuels.
• Tighter refining capacity + higher fuel prices = wider margins. A crack spread is simply the difference between what a refinery pays for crude oil and what it earns selling the gasoline, diesel and other fuels made from it. With refining capacity constrained and supplies disrupted by tensions in the Middle East and Russia, finished-fuel prices have risen faster than crude. That widening gap flows directly to refinery margins. In the US, the 3-2-1 crack spread has averaged about $63/barrel this quarter—above the peak following Russia’s 2022 invasion of Ukraine.
• The stocks have gotten the message. Refiners like Marathon Petroleum, Valero Energy, Phillips 66 and Calumet are benefiting from some of the strongest margins the industry has seen. And this isn’t just a U.S. story: refiners overseas, including HELLENiQ ENERGY in Greece and S-Oil in South Korea, are benefiting from the same tight global market for gasoline, diesel and jet fuel. Crude shippers are benefiting, too. DHT Holdings, Nordic American Tankers and Teekay Tankers are seeing stronger demand as disruptions force oil onto longer, less efficient trade routes, tightening tanker availability and pushing shipping rates higher. With product inventories low, refining capacity difficult to add and global trade routes increasingly disrupted, the conditions supporting both refining margins and tanker rates could persist even after a significant run in the stocks.