US Gulf Coast 3:2:1 Crack Spread Falls Last Week
Crude Oil, Refined Products Prices Fall: Week Ended September 18
US Gulf Coast 3:2:1 crack spread
The benchmark US Gulf Coast 3:2:1 crack spread fell ~5.4% last week. It hit $10.488 per barrel on Friday, September 18. On Friday, September 11, the spread was $11.087 per barrel. For context, the US Gulf Coast crack spread peaked at ~$26 on August 12. The lowest crack spread levels this year reached ~$3.50 early in January.
The above graph illustrates the US Gulf Coast 3:2:1 crack spread over the last few days. The 3:2:1 crack spread reflects a theoretical calculation of the difference between the price of two barrels of gasoline and one barrel of distillate fuel, and the cost of three barrels of crude oil from which these products are assumed to be produced.
Crack spreads usually decrease when crude oil prices (USO) increase by more than product prices or when product prices fall more than crude oil prices. The latter was the case in the week ended September 18. WTI prices were flat, while gasoline prices fell 1% and diesel prices fell 4%.
Why watch crack spreads?
Crack spreads represent the price difference between refiners’ revenue, derived from the sale of finished refined products, and refiners’ costs or the price of crude oil (USO). So they’re an important metric that drives refiner profitability and market valuation. This is something investors in refiner stocks should watch.
A narrower crack spread decreases the profit margins of refiners like Valero Energy (VLO), Phillips 66 (PSX), Marathon Petroleum (MPC), and Tesoro (TSO). They would have to purchase raw materials or inputs at a higher rate. Conversely, wider crack spreads increase profit margins for refiners. Together, these companies account for ~12% of the Energy Select Sector SPDR ETF (XLE).
These companies spinned off some of their midstream assets to form Valero Energy Partners (VLP), Phillips 66 Partners (PSXP), MPLX (MPLX), and Tesoro Logistics (TLLP). These are all midstream MLPs. A narrower crack spread would indirectly hurt these companies. The lower volumes produced by their refining parents in response to higher input costs would mean less volume to transport. This would hurt the MLPs’ revenue. For more on crack spreads, please read Crack Spread 101.
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