Looking to the Futures

While crude oil prices have risen sharply since the U.S. and Israel attacked Iran on February 28th, refined product prices have also gained ground. Given the pace of the increases, the profit margins of refiners have expanded as a consequence of the war. This can be seen in the higher numbers in “crack spreads,” which compare the cost of the input (crude oil /CL) with the sale price of the primary outputs (gasoline /RB and diesel fuel or heating oil /HO). 

The crude oil complex tends to have strong correlations between the primary input component and its finished products. Energy traders look at the crack spread, which provides the price relationship between crude oil (/CL) and the refined products heating oil or diesel fuel (/HO) and gasoline (/RB). The standard 3-2-1 crack spread ratio is three crude oil contracts compared to two gasoline contracts and one heating oil contract. The crack spread price can be quoted and charted on thinkorswim Desktop using the combined symbol 28*/RB+14*/HO-/CL (copy + paste-able into thinkorswim Desktop).

A similar version of the crack spread is the 5:3:2 crack spread. This ratio more accurately represents the average output of many refiners and uses the formula 25.2*/RB+16.8*/HO-/CL (copy + paste-able). The typical 42-gallon barrel of oil at U.S. refineries produces 19.6 gallons of gasoline and 12.5 gallons of diesel fuel, along with smaller amounts of kerosene, asphalt, and other products. The multiplication is part of the formulas to make the amounts of each line up. A crude oil contract represents 1,000 42-gallon barrels, while heating oil and gasoline contracts equal 42,000 gallons.

Broadly speaking, a higher value for that ratio means higher profits for refiners. Since the onset of hostilities, the 3:2:1 crack spread has increased from 33.39 per barrel to 47.18 per barrel (+41.3%), while the 5:3:2 crack spread has increased from 34.19 to 49.97 per barrel (+46.2%). The 5:3:2 crack spread has risen faster since it has a higher allocation in its price to heating oil, which has increased more than either crude or gasoline. Crude oil prices have increased by 54% since the end of February to the highest price since June 2022. Gasoline prices increased by 42% to the highest prices since July 2022. Heating oil, meanwhile, has gained over 65% to all-time highs.

Refiners are taking advantage of these higher margins by maximizing output. The most recent Weekly Petroleum Status Report from the Energy Information Administration showed refinery utilization for the third week in March at 92.9%, versus expectations of 91.5%. That is the highest utilization rate in March since 2018. The utilization rate for the full month of March is over 90% for the first time since 2022, not coincidentally the last time the crack spread prices have been over 40 for the month. Every March, refiners often take capacity offline temporarily to switch from the cheaper winter blend to the more expensive, less volatile summer blend.

Heating oil futures (/HO, currently set for May delivery) largely traded in a range between $2.00 and $2.50 over the past year until the end of February. The recent rise has been accompanied by heightened volatility. On two trading days in March, the day’s range exceeded the entire range of the previous twelve months. Since the all-time high on March 23rd, the contract has settled down some, retreating below the 9-day SMA. The RSI has retreated from overbought territory but is still elevated at 63 while the MACD has turned negative.

9-Day SMA                       4.088

20-Day SMA                  3.808

50-Day SMA                  2.822

14-Day RSI                    63.4

ADP Employment Change 8:15 AM ET

EIA Crude Oil Inventories 10:30 AM ET

ISM Manufacturing Index 10:00 AM ET

MBA Mortgage Applications Index 7:00 AM ET

Retail Sales 8:30 AM ET

Retail Sales, ex-auto 8:30 AM ET

S&P Global U.S. Manufacturing PMI - Final 9:45 AM ET

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