The crack spread margin over the past year has been weak and has put severe pressure on U.S. refiners with high operating costs. The crack spread measures the theoretical margin in dollars per barrel that refiners can earn from refining (or “cracking”) three barrels of oil into two barrels of gasoline and one barrel of heating oil. The chart below shows the crack spread for the second nearest-futures contract in order to eliminate the spikes that sometimes occur when the front month contract expires.
The crack spread saw severe downward pressure in late 2008 when the financial crisis caused gasoline and heating oil prices to fall even more sharply than crude oil prices. The crack spread fell as low as $1.95 per barrel in late December 2008, a level at which all U.S. refiners would be losing money after taking into account other operating and overhead expenses. The crack spread in 2009 has recovered somewhat and is currently at $8.20 per barrel. However, that is still well below the average of about $13 per barrel seen during 2005-07 before the U.S. housing and financial crises emerged.
The crack spread is not likely to show sustained improvement until strong demand emerges again for gasoline. U.S. fuel demand is currently about 3% below the five-year average due to the recession and the fact that drivers and businesses are spending as little as possible on fuel. Increased ethanol usage is also having a negative impact on gasoline demand as the percentage of ethanol in fuel rises due to federal renewable fuel standards. In fact, BP CEO Tony Hayward in June made the startling comment that U.S. gasoline demand may have permanently peaked due to increased ethanol blending requirements, higher fuel efficiency standards, and gasoline-electric hybrid vehicles. He said BP in the first half of 2008 “probably sold as much gasoline into the U.S. as we’ll ever sell.”
The U.S. refinery industry will be in for some even rougher sledding if gasoline demand and prices do not soon recover to higher levels. The bottom line for market prices is that there is likely to be continued downward pressure on the crack spread at least until a sustained U.S. economic recovery begins.
Source: Futures Magazine Market Pulse
