Filling Up at the Pump

Chart of the Day: Oil Prices Are Actually Significantly Higher Than You Think

The Oil market is projecting a false sense of stability when it comes to energy inflation. Instead, the real economy is suffering a much stronger price shock than it appears because fuel prices are rising much faster than crude Oil itself. Crude Oil has risen about 13% since the start of the Russian-Ukraine conflict, but the produced products (gasoline up 33%, diesel up 69%, and jet fuel up 137%) have risen much higher. See this in the chart below and learn more here.

Oil Complex Prices Since Russia Conflict 2022-04Crude Oil is trading at around $110 a barrel – expensive but not extortionate. The bad news is that inflation in producing crude Oil products in normal times would mean crude Oil would be between $150 and $275 a barrel. See this same effect in the recent price charts of crude Oil and subsequent Oil products in the chart below and learn more here.

Oil Complex Prices 2022-04

What’s changed? Refining margins have exploded. And that means energy inflation is far stronger than it appears.

Oil refineries are complex machines capable of processing multiple streams of crude into dozens of different petroleum products. The industry measures refining margins using a rough calculation called the “3-2-1 crack spread”: for every three barrels of WTI crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel like diesel and jet fuel.

From 1985 to 2021, the crack spread averaged about $10.50 a barrel. More recently, the crack spread has edged higher, but the crack spread rarely surpassed $30. Recently, however, the margin jumped to a record high of nearly $55. Crack margins for diesel and other petroleum products surged much higher. See this in the chart below.

Oil Crack Spread 2022-05

Here are four reasons some have given for the explosion in refining margins.

  1. Demand, particularly for diesel,  has rebounded strongly, depleting global inventories.
  2. The US and its allies have tapped their strategic petroleum reserves to cap the rally in crude Oil prices but don’t affect the Oil products pricing.
  3. Refining capacity has declined where it matters for the market now, and the plants that are operating are struggling to process enough crude to satisfy the demand for fuel.
  4. Sanctions and unilateral embargos on Russian oil.

As of April 2021, the US had 18.1 million barrels per day of petroleum refining capacity. US refining capacity had reached a record high of nearly 19.0 million barrels per day as of January 1, 2020, but several refineries have closed since then, resulting in a capacity decline of 4.5 percent.

While the US has been shuttering refineries, China has invested in them. In fact, for most of 2020, China’s refineries processed more crude than U.S. refineries. In April 2020, more crude oil was being refined in China’s refineries than in U.S. refineries for the first time on record, and the trend continued for all remaining months in 2020 except for July and August. See this in the chart below and learn more here.

US Oil Refining Capacity 2021

So these crack spreads could remain high and may even go higher. The US is simply not investing in Oil, whether it be in exploration or in Oil products production. Hence, higher prices are to come. Why, you may ask?

It’s part of the New Green Deal … we are saving the planet. China? They don’t seem so concerned about saving the planet, do they?

See more Chart of the Day posts.

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 RWR original article syndication source.

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Written by Tom Williams

Born down on the farm in America's Midwest, my early life was spent climbing the ladder via a long career in information technology. Starting as a technician, and after earning a degree going to night school, I eventually found a place working at ATT Bell Laboratories as a software engineer.

Later moving into management and then a long stint in a major management consulting firm working with major banking, telecommunications, and retail companies. Working in various states in America, I also spent considerable time living and working in several European countries - currently expat in France. As a side career, I was heavily involved in real estate development and an avid futures trader. This experience can give one a unique view of the world.

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