Lower oil prices generally lead to lower consumer fuel prices…but not always.
There is a risk that the models are overly correlated with oil prices and this leads to expectations of lower prices for consumers and businesses, but if you have seen the gas pumps lately, you will know that is not the case. The huge gap made President Trump threaten oil companies, but the problem is that the refineries do not have the crude.
The problem is crack propagation. Fracking differences highlight the profit margin of converting crude oil into fuel, where “cracking” refers to breaking down heavy hydrocarbon molecules into lighter products. Prong 3-2-1 assumes that the refinery purchases three barrels of crude oil and produces two barrels of gasoline and one barrel of distillates, such as diesel or heating oil.
This spread reached a record high of $65. This means the refinery can buy a barrel at $71 right away and convert it to gasoline/diesel at $136. This is likely because refineries were cautious in adding inventory during the war or were prevented from operating, such as in the Hormuz region, where more than 10% of the world’s oil products are refined.
“The result is a global tightness in refined products rather than crude oil itself, meaning consumers are likely to see only limited relief in fuel prices in the near term. High transportation costs are another concern for the rest of the consumer basket given continued rise in diesel prices,” the National Bank wrote today.
