Cracks in the System
The Gist: The loss of crude feedstock to the Asian refining complex, following the effective closure of the Strait of Hormuz, is driving a rapid widening in crack spreads. Focusing solely on the flat price of oil misses the point—refinery run cuts in Asia are suppressing crude demand even as product markets tighten. Jet fuel is already feeling the strain, and distillates are next. Global crack spreads tend to move in unison. Expect refined products—and alternative crude slates—to be pulled into the region to capture record margins. What starts as a regional disruption in Asia can quickly evolve into a global crisis. Sound familiar?
Programming note: I moved up this post and pushed the original post on offshore drillers to next week’s piece in order to get this in front of you sooner. Enjoy.
For those less focused on refining, remember: we don’t consume crude oil—we consume refined products.
The consensus view seems to be that, despite tensions in the Strait of Hormuz, financial markets and oil tourists—believe “the oil market is signaling the Iran war won’t spiral” (HERE)
We disagree.
Multiple reports (HERE, HERE, HERE and HERE) indicate that Asian refiners are beginning to cut runs, either because they cannot secure feedstock or because delivery timing has become too uncertain. Refiners in China, Thailand, Indonesia, Japan, South Korea and other countries are reducing throughput which reduces product yields and increases product prices.
In some cases, refiners are accelerating maintenance and planned turnarounds that were originally scheduled for later this year, hoping that by the time the turnaround is completed, the Strait of Hormuz will have fully reopened. The last thing they want to do is fully shut down because restarts are difficult and costly.
Adding to the pressure, Chinese refiners are reportedly being instructed to curb exports of refined products, specifically diesel and gasoline. Kerosene—used to produce jet fuel—is China’s largest refined product export. Keep a close watch for further announcements.
While much of the attention has focused on the spike in shipping costs—now reportedly $10–$20 per barrel—the strain is increasingly visible in refined product prices.
The strain is most acute in jet fuel. Unlike other refined products, jet fuel has far stricter storage requirements. It must be protected from reactive metals, is highly sensitive to water contamination, and requires storage tanks lined with specialized epoxy coatings to prevent rust. It also demands higher levels of filtration.
As a result, storage capacity for jet fuel is typically lower than for other products, making it more vulnerable to supply disruptions.
What we’re seeing now is a sharp spike in both the outright price and crack spreads for kerosene-type jet fuel in Asian markets. The move has not yet fully registered in Europe or the U.S. Gulf Coast, but crack spreads tend to move in tandem across regions, as shown below.
