The US refining industry is currently experiencing a very rare event, a negative prompt month futures gasoline crack spread.
The chart below reflects the value of this spread dating back to 1990. Over nearly three decades, this spread has bottomed in the $1.00-2.50 range. Recently this spread has been forced into negative territory off the back of 1) position liquidation driven by the global credit crisis and 2) demand destruction driven by weakening economic conditions and lack of supply following the 2008 hurricane season.
This spread is calculated utilizing the NYMEX prompt month futures markets. Therefore, the chart above represents gasoline delivered at NY harbor vs. WTI crude oil delivered at Cushing, OK. Despite the location basis, the chart provides information which is quite useful in understanding the cash flow of refining businesses.
Generally speaking, US refiners are getting hammered by the gasoline crack spread. Expect to hear stories of refiners reducing gasoline production (to the most efficient point on their cost curve) and extended shutdowns for maintenance.
The spread, which is the difference in price between WTI Nymex front-month futures and Nymex Rbob (gasoline) futures - the so-called refining margin - has gone negative. And it’s been negative since October 3.
The above indicates that it’s currently not at all profitable for refineries to be running crudes into gasoline. More worrying, the heating oil crack has also been narrowing this month, meaning there’s fewer profits in producing middle distillates too. Middle-distillate demand (which goes into making diesel) had been the one saving grace for the products market, with refineries depending on the crack to make good on their p&ls. Many analysts even noted how the shift away from gasoline and towards distillates (presumably as US drivers switched to diesel-run cars) was leading to a situation where gasoline was after a point effectively becoming a by-product.
With these sorts of shoddy fundamentals, it now like many refineries will be forced to shut down units.
So whatever the WTI price of crude does, the negative crack spread is worth remembering. Until it goes away stocks will likely continue to build - a bearish signal for oil.