Crack Spread Chaos: Gas Prices Skyrocket Amid Supply Disruptions

Oil prices have fluctuated this summer due to ongoing tensions in the Iran war, but gas and diesel prices have continued to rise. This phenomenon is known as a 'crack spread,' which refers to the difference between the price of oil and the products derived from it, such as gasoline, diesel, and jet fuel.

The recent surge in gas and diesel prices has been exacerbated by supply disruptions. The closure of the Strait of Hormuz and strikes on Middle East refineries have disrupted over 20% of global seaborne oil product trade this year. Unlike crude oil, which can be transported through pipelines, the loss of these flows has not been offset.

The Ukraine drone attacks that knocked more than 40% of Russia's refining capacity offline have also worsened the strains on refined product markets. China's reduction in fuel exports has further tightened supply chains, leaving the United States as the only major refining hub still operational. However, record exports from the US are drawing down already tight inventories.

As a result, crack spreads have reached record highs, with gas prices up 98% this year compared to a 44% rise in WTI crude oil prices. BofA strategists warn that the market is entering its strongest seasonal demand period with very little margin for error, particularly because global gasoline remains exceptionally tight.