Falling oil prices usually mean lower fuel costs for consumers… but this time, that may not be the case.
There is a risk that market models are overly reliant on crude oil price movements, leading to widespread expectations of lower energy costs for consumers and businesses. However, a recent look at gas stations reveals this isn't the case. A significant price gap has emerged between refined product prices and crude oil prices, even prompting Trump to threaten action against oil companies. But the problem isn't with the oil companies; it's with refineries lacking sufficient crude oil supply.
The real issue lies in the "crack spread." The crack spread reflects the profit margin a refinery makes after processing crude oil into fuel. "Cracking" refers to the refining process of breaking down heavy hydrocarbon molecules into lighter fuels. The most common "3-2-1 crack spread" assumes a refinery buys 3 barrels of crude oil and produces 2 barrels of gasoline and 1 barrel of distillate fuel (such as diesel or heating oil). Currently, the 3-2-1 crack spread has surged to a record $65 per barrel. This means refineries can purchase crude oil at a spot price of $71 per barrel and process it into refined petroleum products such as gasoline and diesel, worth approximately $136 per barrel.
This situation likely arises because refineries are cautiously replenishing their inventories during wartime or are unable to operate normally due to the conflict, particularly in the Strait of Hormuz region—where over 10% of the world's refined petroleum products are refined. The National Bank of Canada wrote in its latest report: "As a result, what is truly tightening is the global supply of refined petroleum products, not crude oil itself. Therefore, consumers may only see a limited decline in fuel prices in the short term. Meanwhile, diesel prices remain high, and transportation costs remain high, which will continue to put upward pressure on the prices of other consumer goods."
