Key Takeaways

  • Crude oil price tells only half the story; the crack spread (the refining margin) can surge independently, driving refined products to $230 a barrel when crude sits at $110.
  • Russia is the second-largest diesel exporter on the planet, meaning supply shocks quickly drain middle distillates out of Europe and push London gas oil crack spreads to $75 per metric ton over Brent crude.
  • Refining geography dictates physical vulnerability: PADD 3 in the US Gulf Coast functions as the refinery kitchen, leaving fuel-dependent regions like New York Harbor vulnerable to supply shocks and dependent on European imports.
  • Jet fuel and diesel share the same middle distillate cut from the refining process, binding airline operating expenses directly to global trucking and industrial demand.

The Refinery Kitchen and Regional Imbalances

Most corporate operators track crude oil prices when forecasting energy expenses. That is a mistake. Crude oil is unrefined sludge. You cannot pour it into an engine or a jet turbine. Between raw crude and usable fuel sits refining capacity, and refining capacity has hard physical limits.

David Kang points out that refining assets are geographically concentrated. In the United States, that concentration sits squarely on the Gulf Coast. As Kang explains: “the Gulf, or PADD 3 in the United States, is the kitchen. That's where all the refineries are. And so that's where all the product comes out of. New York Harbor, right, it's you know, they don't have any access. They maybe have a small pipeline, but that's about it.”

When local logistics break down, regional centers must import refined products across oceans. “So a lot of times what the East Coast does is they buy diesel from Europe in order to make sure that they don't have, you know, a shortage at any one time,” Kang notes. When European refining capacity experiences stress, the East Coast pays the premium immediately.

When the Spread Decouples From Raw Inputs

The financial metric governing refinery margins is the crack spread: the dollar difference between a barrel of crude oil and the refined products extracted from it. In balanced markets, crack spreads trade within predictable historical bands. When refining capacity bottlenecks or geopolitical events cut product flows, the spread explodes.

Kang highlights extreme dislocations where the cost to refine eclipsed the cost of the raw material itself: “I mean, just recently, right, you had heating oil versus TI go through $100 for the crack. You know, they're like $107, right? That's like insane amounts of money, right? It's 230 bucks a barrel while crude is trading at 110.”

Similar disruptions hit European markets when Russian flows stopped. “Russia's the second biggest diesel exporter on the planet,” Kang says. “So a lot of diesel has been taken out of the whole complex, and honestly right now Europe's pretty short, and that's one of the reasons why London gas oil has just gone through the roof.” Under those conditions, Kang notes that with Brent crude around $120, traders saw “probably like a 74 to $75 crack on gas oil in Europe.”

Because jet fuel (Jet A-1) and diesel both come from the middle distillate fraction of crude, airlines cannot escape these industrial bottlenecks. An airline treasurer hedging fuel cannot look only at crude benchmarks; they must manage the crack spread itself.

What to Do With This

Audit your primary cost drivers to find where intermediate processing margins are hidden inside supplier contracts. If your vendors pass through raw material indexes while quietly padding or unhedging conversion fees, renegotiate those agreements this week to unbundle processing margins from base commodity inputs.