Analysis: Crack Spreads Soar as Fuel Supply Stays Tight


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- After two weeks of resurging flows from the Middle East, 
crude oil prices have plummeted close to pre-war levels, with Brent dropping 
below $71 bbl and WTI below $68 bbl. Refined product futures prices, however, 
have softened at a much slower pace, sending crack spreads and refining margins 
soaring.

   This week, crack spreads rocketed close to their all-time high reached in 
the first months of Russia's invasion on Ukraine in 2022 when they briefly 
topped the $60 bbl-mark. The 3:2:1 crack spread versus Brent on Wednesday (7/1) 
jumped to $59.213 bbl, more than twice the levels in late February before the 
start of the U.S.-Israeli war on Iran.

   In contrast to the 2022 Russia-Ukraine conflict scenario, cracks have since 
the reopening of the Strait of Hormuz completely diverged from the underlying 
crude price. They typically move in tandem, given that a higher crude price 
results in higher product prices and therefore a larger difference. Throughout 
June, however, crude prices came crashing down while crack spreads rallied.

   The flood of crude oil leaving the Persian Gulf since the reopening of the 
Strait of Hormuz has led to a temporary glut in a market which for the last 
four months adapted to severely restricted supply. Ship tracking data showed 
outbound tanker traffic returning to around two thirds of normal levels last 
week. Global refiner demand is still reeling from the disruption as refiners 
were forced to slash runs amid the lack of input availability, all while 
emergency stockpiles continue to be released. This has led to a temporary 
imbalance where refiners are geared toward operating at restricted levels, 
which is reflected in their crude cargo bookings and current buying interest. 
While the reopening of Middle Eastern spigots was immediate, refiners ramping 
up operations can't be.

   This months-long refining lull meant months of low fuels production and 
tightening inventories. The decline in commercial crude oil stocks was 
feathered by vast releases from emergency reserves by the U.S. and other member 
countries of the International Energy Agency. So far, close to 90 of the 
planned 172 million bbl have been released from the U.S. SPR, which has 
consequently dropped to the lowest since 1983. This respite was not available 
for refined products. To make matters worse, global product inventories were 
nowhere near as well-stocked as crude oil inventories, which in January stood 
at the highest in five years.

   All this was evident in price movements in June. While crude futures have 
relinquished nearly all their wartime gains, refined product futures continued 
to hold on to a portion of them. Front-month NYMEX RBOB futures are still 
trading some 38% higher than on the last day of February, while NYMEX ULSD 
futures continued to be 19% above pre-war levels.

   Much of the demand destruction stemming from logistical constraints may be 
restored, but high prices have weighed on both current and likely future fuels 
demand. The silver lining for crude demand is the need to restock depleted 
global inventories, but for now, at least strategic reserves will continue to 
dwindle. The IEA in its latest monthly report estimated that global oil demand 
would shrink by 1.1 million bpd in 2026, compared to earlier estimates of a 
420,000-bpd decline and pre-war expectations of a 900,000-bpd increase.

   The final outcome of the race between resurging supply from the Middle East 
and rebounding global oil demand is hard to gauge. For now, however, a tight 
products balance combined with a temporary crude glut translates into hefty 
refining margins and fuel prices only gradually easing compared to crude, 
proving true more than ever the industry adage of product prices "rising like a 
rocket and falling like a feather".

    




(c) Copyright 2026 DTN, LLC. All rights reserved.