Refinery stocks drop as narrow crack spreads hint at normalization

At $89, oil does not pose a major challenge for consumers or businesses. Crude prices have fallen sharply over the past week, largely on expectations that Trump or Congress may manage to open Hormuz and bring the Iran conflict to an end.

Whether that happens remains uncertain, but crack spreads remain extremely wide. Under normal conditions, gasoline would trade near $3.60 to $3.75, and diesel a bit higher, with cracks of around $22 for gasoline and $30 for diesel. However, refining constraints have pushed gasoline to a roughly 60-cent premium and diesel to a $2.25 premium.

These elevated prices have become a significant electoral issue, and improvement is unlikely as long as the conflicts in Ukraine and Iran persist. In fact, they could deteriorate further with possible increased attacks from Ukraine, Iran, the US and the Houthis.

The outlook appears poor, with winter bringing increased demand for distillates used in heating.

However, one positive indicator is the decline in refinery stock prices. Valero, a pure-play refiner, has fallen 22% since October 13.

On a broader scale, the CRAK refiners ETF has declined 16% from its October high.

In mid-October, product tightness reached extremes with cracks at $100. Since then, jet fuel cracks have narrowed to $77, with a larger drop in distillates. Diesel cracks currently stand at $83, down from $102 in mid-October and $92 on October 23. Interestingly, crack spreads have not narrowed further in recent days, yet refiner shares keep falling. This could be a forward-looking signal or simply market beta, but it merits attention.