U.S. distillate crack spreads return to February 2022 levels for the first time since Russia’s full-scale invasion of Ukraine

U.S. distillate crack spreads have returned to February 2022 levels, 15 months after Russia’s full-scale invasion of Ukraine disrupted global crude oil and petroleum product markets (Figure 1). Distillate prices and crack spreads increased rapidly in the spring of 2022 as the possibility of lower exports from Russia increased crude oil prices to their highest levels since 2014. As crude oil prices declined in the second half of the year, distillate prices peaked a second time because of seasonal demand and higher shipping costs following the EU’s announcement of a ban on petroleum product imports from Russia, which began in February 2023. These factors increased the distillate crack spread to a historical high of $1.72 per gallon (gal) in October, more than four times higher than the previous five-year (2017–2021) average. U.S. distillate crack spreads have declined since then because new trading patterns eased supply concerns and warmer-than-normal weather reduced distillate consumption during the winter.

Tightness in global distillate supply has eased as alternative suppliers have increased shipments to Europe. Historically, Russia has been Europe’s top supplier of distillate, and global prices rose in 2022 on the back of concerns about disruptions to Russia’s Europe-bound shipments. Because distillates are a globally-traded commodity, this increased U.S. crack spreads, even though most U.S. distillate exports are delivered to Latin America. In the four months since the EU implemented the ban on petroleum product imports from Russia on February 5, Russia’s exports to Europe declined 96% to 24,000 barrels per day (b/d) from 630,000 b/d in 2022 (Figure 2). Over the same period, exports to Europe increased from the Middle East by 51% (160,000 b/d); from Asia by 97% (147,000 b/d); and from North America by 65% (47,000 b/d). Additionally, China’s distillate exports returned to historical levels starting in the fourth quarter of 2022 after the government raised export quotas. Finally, Russia’s exports outside of the European market have not decreased. Instead, Russia’s distillate exports increased 6% in the last four months compared with the 2022 average, according to Vortexa data, as Russia diverted its distillate exports away from Western countries with sanctions.

U.S. consumption declined for several reasons at the end of 2022 and into 2023, reducing distillate prices and crack spreads. U.S. distillate consumption during the 2022–23 winter heating season (October through March) averaged 3.98 million b/d, or 3% (114,000 b/d) below the previous five-year average (Figure 3). A cold weather front in December significantly limited transportation in the Midwest and Northeast, reducing diesel consumption for that month to its lowest level since 2012. Conditions changed in January and February, with temperatures running 20°–30°F higher than normal in the eastern half of the country, where nearly 5 million households (mainly in the Northeast) use heating oil as the main space heating fuel. Consumption of heating oil averaged 358,000 b/d last winter, or 12% (49,000 b/d) less than during the 2021–22 winter heating season. Heating oil consumption, similar to propane consumption, was the lowest for a winter heating season since at least 1990, as a result of warmer-than-normal temperatures.

Although distillate crack spreads have declined, they remain high by historical standards. The May average crack spread of 54 cents/gal is 65% higher than the 10-year (2012–21) average of 33 cents/gal for May. Low distillate inventories, which have been below the five-year average since April 2021, are contributing to higher crack spreads (Figure 4). Typically, higher crack spreads incentivize refiners to produce more petroleum products to capture higher margins. Although increased refinery production has not yet resulted in a substantial increase in distillate inventories, increased refinery capacity coming from ExxonMobil’s Beaumont refinery expansion combined with LyondellBasell’s decision to delay closing its Houston refinery until 2025 could help to increase inventories. We expect increased refinery capacity will result in higher refinery production and slightly higher inventories by the middle of 2024, according to our latest Short-Term Energy Outlook. If our forecast is realized, upward price pressure due to lower-than-average inventories could keep distillate crack spreads elevated compared with pre-2022 levels.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.