Summer Preview: Gasoline Slumping


"Traders think summer driving season's going to be a big bust."

It's driving season and the wholesale market is now turned upside down. Yesterday, gasoline cracks fell below those of middle distillates like diesel and heating oil. Cracks represent the yields obtained from the sale of refined products versus the cost of crude oil inputs.

We warned of the shrinking margins available to gasoline refiners in A Short Crack Season?. Right now, traders are starting to think the summer driving season's going to be a big bustóat least as far as petrol's concerned.

NYMEX-Implied 3-2-1 Refining Margins
NYMEX-Implied 3-2-1 Refining Margins

This spring, there was more money to be made by refining gasoline vs. other distillates. The profit margin derived from 3-2-1 operations (refiners turning three barrels of crude oil into two barrels of gasoline and one barrel of a middle distillate such as heating oil) was higher than that of 2-1-1 refiners (those breaking two barrels of crude into a barrel each of gasoline and a middle distillate) since mid-January. The 3-2-1 premium topped out at 1.44% on March 8. The gasoline guys were making a spot return of 14.49% while refiners cranking out more middle distillates were earning a gross 13.05% margin.

Cyclically, crack spreads peak in mid-May. In the recent past, the mid-May premium earned from heavy gasoline production topped out at 3.46% (not counting selloff year 2008, when middle distillates brought in a 3.51% premium over gasoline).

Yesterday, the middle distillate guys earned 0.04% more than the petrol pushers. Doesn't sound like much of a premium, but it's the fact that there is a premium that's important. It's an indication that the summer window is closing.

So, is the shallow premium attained from gasoline refining a signal of trouble ahead? Well, it sure isn't good news. If this is all that summer's going to offerórefiners' bottom lines are going to be more dependent on diesel and heating oil sales for the rest of the year.

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