Crack Spreads Soar as Global Refining Capacity Plunges

Central banks around the world are shifting their focus from crude oil prices to refined product prices due to rising concerns about inflation. According to Bank of England Governor Andrew Bailey, the widening crack spread, the price differential between refined fuels and unprocessed crude oil, is a more accurate indicator of energy costs feeding through to the real economy.

The European Central Bank issued a similar warning in late July, noting that constrained refining capacity is pushing up gasoline and diesel prices, creating additional inflationary pressure. Market data shows that European drivers are paying over $370 per barrel for gasoline and diesel at the pump, far above the market price of crude oil itself.

Refining capacity has been severely battered by conflicts in the Middle East and Ukraine, resulting in a loss of millions of barrels per day. Unlike the crude oil market, supply contractions in the refined products market are harder to buffer. The Russian government imposed a diesel export ban after its refineries came under attack, further constricting supply.

Russell Hardy, CEO of Vitol Group, estimated that Middle East refined product exports have fallen by around 2 million barrels per day due to drone attacks, with Russia accounting for another reduction of about 2 million barrels per day. The premium of European benchmark diesel futures over Brent crude has surged from approximately $21 per barrel on January 2 to about $75 per barrel as of Wednesday, an increase of more than 200%.