February 05, 2019 | by Joel Fingerman
Gasoline and diesel fuel (heating oil) are the primary outputs from refiners distilling crude oil. The difference in price between these refined products and crude oil is the refining margin, or crack spread. The gasoline crack spread has fallen from $15 last summer and early fall to as low as $4 recently (Chart 1, black line), while the heating oil (diesel fuel) crack spread has been $24 or higher during the same period (Chart 2, black line).
Gasoline demand is not growing, yet refinery gasoline output remains at high levels. As a result, gasoline refining margins (the crack spread) have been decreasing since October. The high heating oil crack spread is a result of increased demand for diesel fuel (heating oil) and anticipated even greater future demand.
The expected greater demand for diesel fuel comes from forthcoming 2020 International Maritime Organization regulations on sulfur content in maritime fuels. The heavy, polluting bunker fuels currently used by ships will be replaced by less polluting diesel fuel and gasoil, so the demand for diesel fuel and gasoil will spike in 2020.
With diesel margins high and gasoline margins low, refiners would want to maximize diesel output. However, most refineries are configured to produce twice as much gasoline as diesel fuel from every barrel of crude oil. Refiners cannot significantly reduce gasoline production in favor of diesel. If refineries increase diesel production that will also mean an increase in gasoline production. With flat gasoline demand, gasoline stocks will increase, putting more pressure on the gasoline crack spreads while the heating oil cracks remain strong.