The rise in crude oil price in recent days has been weighing on markets. But even before this, there was another factor – crack spreads – that was serving as a forewarning as mentioned in our Big Story article titled Time is ticking for oil reserves in bl.portfolio edition dated July 19, 2026. The crack spreads determine the final end price that consumers pay for products like gasoline (petrol) and diesel, and this has direct bearing on inflation in respective countries.

While the oil prices are on a rise now, it did drop considerably in May and June. The Brent crude futures shed 34 per cent during this period. However, crack spread, rose 6.5 per cent.

Globally the diesel prices have been on an uptrend barring for subsidies. Diesel futures too i.e., ULSD (ultra-low Sulphur diesel) in the US hit a fresh life-time high of $5.17/gallon on Friday.  The price of Brent crude futures, a standard reference point for oil prices, globally is now back above the $100/barrel-mark. Since start of the war while crude has risen by 44 per cent to $104.60/barrel, crack spread in the US has risen by 86 per cent to $62/barrel.

Crack spread may not be driving the price of crude oil, but it did provide us with certain information not just about crude oil market, but also about the products market. Here we discuss what is this spread and how and why it matters to us.

3-2-1 crack spread

In simple terms, crack spread is the difference between the price of crude oil and prices of products made from crude oil like gasoline (i.e., petrol) and distillates (like diesel, jet oil, heating oil etc.).

The benchmark is 3-2-1 crack spread, which indicates that three barrels of crude oil converted to two barrels of gasoline and one barrel of distillate. Notably, it mirrors the actual US refinery output.

The formula is [(2 × Gasoline price + 1 × Distillate price) - (3 × Crude price)] ÷ 3.

WTI futures on the NYMEX now trades at $100/barrel. Whereas gasoline futures and diesel futures (ULSD i.e., ultra-low Sulphur diesel) trades at $3.3/gallon (calculated to $138.6/barrel) and $5/gallon (calculated to $210/barrel) respectively on NYMEX. 

After converting prices of gasoline and distillates to barrels (by conversion factor of 42) to standardise units, the 3-2-1 crack spread comes at $62/barrel. 

There are other forms like 5-3-2 crack spread, when one wants more gasoline heavy, or 1-1 crack spread for single product margin i.e., either for gasoline or distillate margins.

Crack spread increases (decreases) if price of products outperforms (underperforms) that of crude oil price. Since refiners convert oil to products, the crack spread can also be said as refinery margins. So, higher crack spread means profitability of refineries is potentially higher and vice-versa.

Reading the spread

The crack spread has been on an upward trajectory since the beginning of the war. While prices of both crude oil and refined products rallied, gasoline and distillates outperformed crude, increasing refinery margins.

Interestingly, even after oil prices corrected sharply following the US-Iran memorandum of understanding in June, the crack spread remained elevated. The reason was the continued tightness in the refined-products market. According to the US Energy Information Administration (EIA), gasoline inventories remain about 6 per cent below the five-year average, while distillate inventories are nearly 14 per cent lower.

Refiners have responded by prioritising distillate production as margins there have become substantially more attractive. While the gasoline crack (margins on gasoline) has moderated to around $38.90/barrel from the July peak of about $59.04, the distillate crack (margins on distillates) has now surged to a record high of $112.76/barrel on Friday before closing lower at $108.20/barrel.

Consequently, the overall 3-2-1 crack spread has remained between $56 and $65 since July, masking the shift underneath, especially in the recent weeks. That is, the contribution of distillates to the crack spread has increased considerably even as gasoline margins have eased.

Part of this tightness can also be attributed to Russia. Ukrainian drone attacks have disrupted between 20 and 40 per cent of Russia’s refining capacity, curtailing production of diesel and other refined products. This has tightened global product supplies further, supporting refinery margins.

The EIA does not expect the situation to ease soon. It projects the US diesel crack to remain above $2/gallon ($84/barrel) through November. Distillate inventories are also forecast to fall below 100 million barrels this month and remain below the five-year range well into 2027.

So far, crude oil supplies have largely continued to flow, aided by alternate export routes, strategic reserve releases and inventory drawdowns. Products, however, have remained tight. If crude supplies also begin to tighten further, the impact could be far more severe.

The risks are already increasing. Saudi Arabia has now shut down the critical East-West oil pipeline, considerably impacting the supply made through this alternative route bypassing Hormuz.

At the same time, inventories are not as comfortable as headline numbers suggest. For instance, combined crude inventories (Strategic Petroleum Reserve (SPR) plus commercial stocks) in the US, which has played big role in compensating for the loss in supply, have declined from about 878 million barrels in early April to about 710 million barrels now. Input to refineries, primarily crude oil to be converted to finished petroleum products, in the US has gone up from 16.21 million barrels/day as on March 20 to 17.47 million barrels/day as on September 4.

Moreover, not every barrel reported in inventories is readily available, as storage facilities require a minimum operational level of oil.

If crude tightens on top of an already tight product market, the result could be a double whammy. Refinery margins could widen further, pushing up petrol and diesel prices. Diesel, in particular, has broader implications because it powers freight and logistics, increasing the risk of inflationary pressures extending well beyond fuel prices.

In India while these may not show up on retail prices of fuel which is practically controlled through government-influenced state oil companies, this may show up increased costs in industrial fuel use. Under recoveries for fuel retailers will also increase considerably.

Published on September 12, 2026