The NYMEX front month 3:2:1 crack spread fell by 3.1% on a weekly basis. It fell from $12.82 per barrel on January 18 to $12.43 per barrel on January 25, 2016. At the beginning of this year, the crack spread was $15.14 per barrel on January 4, 2016. It gradually fell. It posted a 17.9% loss year-to-date.
Gasoline inventory levels drive changes in the crack spread
The crack spread represents the price differential between crude oil and the products extracted from it. The price differential is known as the “crack spread.” If crude oil prices fall, the price differential will increase and vice versa.
Crude oil prices fell since the beginning of 2016. They almost tested 2003 lows, even though the crack spread isn’t rising, despite seeing a downward trend. This means that the crack spread is impacted by other factors like refined product prices, inventory levels, and refinery runs.
The gasoline crack spreads are strong despite lower demand. However, prices impacted the rise in the gasoline inventory levels. The demand for distillate fuels, like heating oil, is quite low because of the warm winter. Refinery runs added more supply glut. So, the crack spread fell even though it gained from lower crude oil prices.
The narrowed crack spread means lower refinery margins. The decrease in the refinery margins has a negative impact on the profitability of refineries and integrated refineries like Chevron (CVX), ExxonMobil (XOM), Sunoco (SUN), and Alon US Energy (ALJ).
Chevron accounts for 13.3% of the iShares US Energy Sector ETF (IYE).
Lower refinery profitability has a negative impact on the production levels. Falling production levels mean lower transport volumes and revenue for MLPs like Alon USA Partners (ALDW) and Phillips 66 PTR (PSXP).