Refinery Margins and Cracks Hit Record

Product cracks and refinery margins hit record highs as the market struggled to meet demand with limited refining capacity, a new BofA Global Research report has noted.

“The petroleum complex ripped higher since the start of the year on tightening inventories and concerns over lost Russian crude oil and product supplies,” the report said.

“Initially, crude oil and products moved higher together, but more recently refined products have taken the lead. RBOB-Brent and ULSD-Brent cracks hit record levels of nearly $49 per barrel and $72 per barrel in May as refiners struggled to meet rising fuel demand,” the report added.

“Shortages of jet fuel have also materialized, briefly pushing spot NYH jet fuel prices above $300 per barrel in April. Elevated gasoline and middle distillate cracks brought refinery margins to record highs too, with NWE Forties hydrocracking margins hitting $37.50 per barrel last week,” the report continued.

The report noted that the world was long refining capacity before the pandemic but added that historic closures during 2020-21 created a deficit in 2022, with capacity falling more than 400,000 barrels per day below pre-Covid levels.

“Yet this figure does not fully capture the tightness in the market. Self-sanctioning against Russia removed another ~400,000 barrels per day of product exports year to date, and more product export losses could come as sanctions tighten,” the report stated.

“Also, lower Chinese export quotas have curbed gasoline, jet, and diesel exports by ~400,000 barrels per day versus 2020. Finally, self-sanctioning and high gas prices created inefficiencies for refiners globally, hindering their ability to respond to recent price signals,” the report added.

“Now, the market is testing new highs, searching for more supply from refiners and demand destruction,” the report went on to state.

In the report, BofA Global Research said it still sees upside for gasoline, diesel, and jet fuel cracks near term as they battle for yield during summer travel season but added that rising economic headwinds should weigh on oil demand and cracks vs the curve later in 2022-23.

Longer term, BofA Global Research also noted that it sees downside for VLSFO-Brent cracks on rising sweet crude oil supply, easing global gas prices, and a potential slowdown in gasoline demand growth.

To contact the author, email andreas.exarheas@rigzone.com