The Loss Of US Refining Capacity Is Helping Drive Record Diesel Prices, And It Won’t Improve Anytime Soon

Analysts and casual observers of oil markets rely on a very simple number to determine the strength of refined petroleum products relative to a barrel of crude: the 3:2:1.

There are far more complex models out there, but the beauty of the 3:2:1 is that anybody can calculate it. Take the futures price of Brent or West Texas Intermediate (WTI) and multiply it by three. Then take the price of reformulated blendstock for oxygenate blending (RBOB) gasoline, an intermediate product used to produce finished gasoline, multiply the cents-per-gallon price by 42 to get dollars per barrel, and then do the same with one barrel of ultra-low-sulfur diesel. Add the RBOB and diesel prices together, subtract the crude price, and you have your 3:2:1 number.

In 2019, the last full pre-pandemic year, the 3:2:1 for WTI averaged $18.63 a barrel, based on data from the daily settlements of the CME Group Inc. commodity exchange. It regularly dipped below $10 a barrel during the pandemic-gripped market of 2020. At the start of this year, it stood at around $20 a barrel.

The 3:2:1 for WTI in recent days has hovered just under $60 a barrel, and traders are shaking their heads because they readily admit they have never seen anything like it. Crude is up, but products such as diesel are up a lot further.- READ MORE