The peace agreement between the US and Iran came under the biggest strain yet on July 7, as both countries traded fresh rounds of attacks, according to a report from Market-TOI. Till then, crude bears appeared to have bowled out bulls, with their confidence reflecting in the steep backwardation of Brent futures. However, with the Strait of Hormuz disruption back in play, crude prices are rising again — but this time, the price behaviour within the crude complex is different.
The Divergence in Crude and Product Prices
One critical metric — the crack spread, which measures the price difference between a barrel of raw crude and refined products — has remained at elevated levels and never cooled. Even when dated Brent and Brent futures fell after the signing of the US-Iran Memorandum of Understanding on June 18, the crack spread did not correct much. According to Market-TOI, the spread declined only 28% from its peak after the peace deal, while Brent futures and dated Brent slumped 41% and 53% respectively. Now, with the latest escalation, the crack spread surpassed its wartime peak of $59.77/barrel and marked a fresh all-time high of $69.16/barrel on July 15.
The 3-2-1 crack spread, a proxy for refinery gross margin, assumes three barrels of crude yield two barrels of gasoline and one barrel of distillate. As a percentage of Brent futures, it increased from 46% before the escalation to a substantial 86% on July 6, and stands at 71% now. This divergence suggests that refined-product markets are considerably tighter than the crude market, and the tightness appears to be driven more by supply constraints rather than a surge in demand.
Inventory Data Reveals Supply Constraints
Part of the explanation lies in inventories. According to the US Energy Information Administration (EIA) for the week ended July 3:
| Product | Deviation from 5-Year Average |
|---|---|
| Distillate (diesel, jet fuel, heating oil) | -12% |
| Gasoline | -6% |
Gasoline inventories were lower due to a combination of lower production, lower imports, and higher exports. At the same time, refiners appear to have prioritised distillates as margins remained significantly stronger. The refining gross margin for distillate (distillate crack) currently stands at about $84/barrel compared to gasoline crack of $52/barrel.
What This Means for Traders
The behaviour of the crack spread relative to crude prices signals that the bottleneck is in refining capacity, not crude supply. Even though crude prices are nowhere near the wartime record highs, the crack spread has reached unprecedented levels. For commodity traders and procurement teams, this suggests that refined product prices — particularly distillates — may remain elevated as long as inventory deficits persist. Key data to watch include weekly EIA inventory reports and any further developments in US-Iran tensions that could impact Strait of Hormuz transit.
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