I believe the oil market is mispriced. Crude is mispriced. Products are mispriced (crazy to believe), and refining margins are masking the underlying issues.
It appears to me that because the “invisible hand” has no way of printing barrels and preventing product prices from going up, the market, the efficient part at least, has been screaming that we have a product shortage.
The 3-2-1 crack spread is sitting near $70/bbl, the highest in history.
Note: Divide it by 3.
And before people start talking about the lack of refining capacity, it’s important to preface some of this with context.
There are currently ~7.5 million b/d of refining capacity outage. Last year, we averaged ~3.5 million b/d of capacity outage.
Normally, we always lose some refining capacity because of operational issues. That’s the nature of refineries. They are fixed beast animals, and while the intent is to keep them operating near full capacity at all times, they can’t. That’s why you undergo seasonal maintenance to reduce the risk of unplanned outages.
Now, some of these refining outages are done on purpose (China), and some of them are by external factors (Middle East + Russia). In total, we have ~4 million b/d of refinery capacity offline compared to last year. Is it possible to replace this?
Absolutely.
Where?
China.
China has so much refining capacity today that if they really wanted to, they could increase throughput by ~7 million b/d (assuming they can get the crude). The issue for China is that running throughput at ~19 million b/d wouldn’t do it any good, because product exports average only ~1 million b/d per month.
For China to fully utilize its refining capacity, it would need to ramp up product exports to ~4 million b/d per month, up from 1 million b/d. That’s unlikely, given that China’s excess refining capacity was built for national security rather than economic reasons.
China learned from what happened to Japan in World War 2. In order to prevent an oil embargo, China needed vast amounts of crude oil in reserve, and since petroleum products have a shelf life, and crude doesn’t. The only solution to the product issue was to build excess refining capacity.
Now, can China save the world? Yes, absolutely, but it would have to do something it never did before, increase product export quotas.
Geopolitically speaking, does China really want to save the US from the current product shortage? Unlikely, so we are now stuck in this weird world where product prices are mispriced because crude is mispriced, but refining margins are the only real signal here.
An interesting dynamic indeed.