Crack Spreads Point North for Crude Prices

Crack spreads – the margins earned by refiners of crude oil into products – have widened again as we approach the advent of a European ban and price cap on Russian refined products. The product ban will be harder for Russia to evade than the previous crude ban, for lack of a similarly scaled shadow fleet. The product price cap has been set above prevailing prices, while the crude ban was set below. So it was costless to be virtuous and observe the crude ban, but Western allies will struggle to make the sacrifices to observe the product ban. European refinery capacity has been in decline for decades, and growing capacity elsewhere faces challenges. As demand grows, set against constrained capacity and attractive margins, it’s a set-up for higher crude prices. With relatively low input costs, US refiners are in a sweet spot as low-cost producers and exporters.