Crack Spread Narrowed despite Lower Crude Oil Prices
Gasoline and Diesel Prices: How Do They Impact the Crack Spread?
Crack spread
The NYMEX front month 3:2:1 crack spread fell by 18.1% on a weekly basis. It fell from $16.4 per barrel on December 18 to $13.4 per barrel on December 24. At the start of this week, the crack spread rose slightly by 1.4%. It settled at $13.6 per barrel on December 28.
Lower crude oil prices didn’t push refinery margins
The crack spread is the price differential between the crude oil and products extracted from it. Refineries extract refined products like gasoline, diesel, and heating oil from crude oil. So, refinery margins can be known by looking at the crack spread. Energy investors carefully watch the crack spread to make their investments.
At the beginning of the last week, crude oil prices tested an 11-week low, even though the crack spread fell more than 18%. It fell due to a fall in the demand for refined products like distillates and gasoline. As a result of the winter season, most of the vehicles are off-road. The heating oil demand is also low due to mild weather.
The crack spread recovered slightly at the end of the last week. Increased trips due to Christmas vacations boosted the gasoline demand. So, the crack spread rose after falling more than 20%. It settled at $13.6 per barrel on December 28.
What’s the impact?
A narrower crack spread means lower refinery margins. Conversely, a wider crack spread means higher margins for the refineries. Last week, the narrowed crack spread in the yields lowered refineries’ revenue like Marathon Petroleum (MPC), Alon USA Energy (ALJ), Western Refining (WNR), Tesoro (TSO), Sunoco (SUN), Holly Frontier (HFC), and Phillips 66 (PSX)
Marathon Petroleum accounts for 1.9% of the Vanguard Energy ETF (VDE).
The narrowed crack spread discourages refining companies from increasing the production volumes. Lower production volumes result in lower transport volumes and lower revenue for MLPs like Valero Energy Partners (VLP) and Phillips 66 Partners (PSXP).
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