Turning oil to fuel has never been more profitable as refining margins surge

Profit margins for US refiners making gasoline and diesel from crude oil are shattering records, as fuel supply disruptions driven by war lift prices for refined products.

The average per-barrel margin US refiners receive for producing two barrels of gasoline and one barrel of diesel from three barrels of crude, known as the “3-2-1 crack spread,” rose as high as $70 a barrel on Thursday, the highest level on record.

While not an exact figure, the number is meant to approximate the activities of a typical US refinery, which tends to produce more gasoline than diesel.

Through the Iran conflict, fuel prices have spiked comparatively higher than crude oil and remained elevated even as crude prices dropped during a now defunct ceasefire. That’s because of geopolitically driven disruptions, persistent demand and unusually low stockpiles, creating headaches for consumers and businesses, as well as central banks seeking to tame inflation. It also presents a risk for US President Donald Trump, whose Republican party will seek to defend legislative majorities in November’s midterm elections.

Diesel futures have spiked this month, with Russia banning most exports of the fuel after months of Ukrainian drone attacks on the country’s refineries. Renewed conflict around the Strait of Hormuz is only adding to the tightness.

In the US, the profit margin for making diesel is approaching record highs set earlier in the war, while retail prices rose above $5 a gallon on Wednesday. In Europe, margins are at an all-time high.

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“Distillate cracks in both the US and Europe have surged toward record highs—an indication that the shock is increasingly becoming a refining story rather than simply a crude supply story,” Natasha Kaneva, head of commodities research at JPMorgan Chase & Co, said in a note.

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Margins for gasoline are also hovering near all-time highs set in June 2022, when pump prices set records in the US. Average retail gasoline prices stood around $3.94 a gallon on Wednesday, according to the American Automobile Association.

In recent months, refiners have produced more jet fuel and diesel at the expense of gasoline. And exports have remained in normal seasonal ranges, keeping stockpiles lower.

Global gasoline and diesel markets are suffering from lost supply coming out of China as well, said Ryan McKay, senior commodity strategist at TD Securities.

China only recently allowed its refiners to export gasoline, diesel and jet fuel after banning shipments for months.

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If China returns to the market in earnest, it could relieve some of the pressure created by Russia’s absence. But it also would likely drive prices higher for crude oil, McKay said.

“It seems like a hard issue to fix without re-tightening the crude market,” McKay said.

There are also more risks ahead in the US. Given the abnormally low amount of fuel in storage in the US for this is time of year, markets appear particularly vulnerable to shocks from disruptions including refinery outages.

With refiners at their “practical operating ceiling” and deferring maintenance, the risk of unplanned outages has risen, potentially boosting volatility, according to Rapidan Energy.

To be sure, there are caveats to the record profits. The 3-2-1 spread uses New York-based futures prices that aren’t necessarily reflective of local costs on the Gulf Coast or elsewhere in the country. And fuel prices also incorporate the near-record costs of credits for complying with the US’s most ambitious biofuels blending mandate ever.

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