International Investing

Without knowing about the “crack spread” the answer is not very intuitive. Trading guru Dennis Gartman explains:

It is not all that difficult to understand when seen in the context of the “crack spread.” The “crack” is the profit margin earned by the refiners, and it has been falling steadily since the late summer. If we look at the 3-2-1 “crack” spread commonly referred to on the NYMEX floor, it made its peak at approximately $14/barrel in August. It is now down to $6, and all of that has been as RBOB gasoline has been the weakest of the refinery complex.

If the “crack” falls even farther, the impetus to disgorge crude inventories shall rise even more severely, for at least heretofore the refiners were willing to fund the cost of storage if the profits earned from refining were high enough. If they fall, then this incentive to store crude will also fall away, and the reduction of crude inventories will become larger not smaller. Narrowing profit margins do that sort of thing.