The Impact of Crack Spreads on Propane Supply
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It’s unusual to mention refinery crack spreads and propane supply in the same sentence, but the correlation is interesting.
What is a Crack Spread?
Simply put, the 3-2-1 refinery crack spread describes the value relationship between 3 barrels of crude oil (in) versus 2 barrels of gasoline and 1 barrel of diesel (out). A wide crack spread means higher refinery margins.
Current crack spreads are as high as they’ve been since 2022, which indicates that global refining and export capacity for refined products is trailing the availability of crude oil. This makes sense when you consider that the United Arab Emirates, Russia and Kuwait are among the top 10 largest diesel exporters and all three countries have had their export capacity compromised.
Subdued Builds for Propane Supply
While refinery margins are stronger than last year, propane inventory builds have been weaker than last year. The U.S. propane supply surplus has been dropping since April (including a surprising, contra-seasonal draw last week) and current inventory levels are only 29% above the 5-year average.
Propane Inventory Levels Above the 5-Year Average
APRIL 29th = 62%
MAY 28th = 36%
JUNE 24th = 35%
JULY 8th = 29%
The Bottom Line
The bottom line is that the cost of refined products such as gasoline and diesel is high now relative to crude oil. That’s evident in the widest crack spread in 4 years. In contrast, the cost of propane is low now relative to crude oil.
So, U.S. propane may be the best energy value now both domestically and in waterborne markets, especially with all that’s happening in the Middle East. It’s no surprise that propane demand has been strong.
The Skinny
It seems odd that there are multiple wars being waged which can adversely impact the availability of refined products, while the LPG market has been relatively calm.
It reminds me of this line from Goethe’s Elective Affinities: “Even in momentous times, when everything is at stake, you do go on with your daily life as if nothing is happening.”
The fact is that the cost of refined products such as gasoline and diesel is high now relative to crude oil. That’s evident in the widest crack spread in 4 years. In contrast, the cost of propane is low now relative to crude oil. That’s evident in the propane-to-crude ratio which has been hovering around 39% versus a historical average closer to 50%.
What’s “The Skinny”? U.S. propane may be the best energy value in the world!
