The crude oil market makes the headlines. Throughout the West Asia conflict, investors have looked at the price of crude oil to understand the energy markets. But there’s another indicator flashing warning signs. It’s called the crack spread. It is the gap between the price of crude oil and the price of refined fuel.
The Mechanics of the 3-2-1 Spread
The 3-2-1 crack spread supposes that we start with three barrels of crude oil. Two of those barrels are refined into gasoline, and one barrel into diesel. The spread is the premium per barrel of the refined fuel, relative to crude oil. Ultimately, as energy consumers, we care about the price of refined fuel.
Join now
As of August 13th, the 3-2-1 crack spread is $66/barrel. This means that the cost of refined fuel is $66/barrel higher than the cost of crude oil. At the end of February this year, the spread was $29/barrel. Between August 2025 and February 2026, the spread ranged between $20/barrel and $35/barrel.
This means the current spread is about two times normal historical levels. Since the start of the West Asia conflict, the spread has steadily risen. In the last month, it has ranged between $60/barrel and $70/barrel. What this means is that energy costs have risen by more than headline increase in crude oil prices. Over the last six months, crude oil prices are up around 50%. The cost of refined fuel is up by closer to 67%.
The Hormuz Chokepoint & Refinery Constraints
What’s driving the higher spread? The strait of Hormuz is a major transit route for refined fuels, in addition to crude oil. Prior to the conflict, around one fifth of global refined petroleum flowed through Hormuz. This compares to around one-third of global crude oil that flowed. Thus, the closure of the strait has reduced the quantity of refined fuel on the open market. The shortage has led to higher prices.
This also means there is a shortage of refining capacity. The increase in the crack spread tells us that refineries are making record profits. It also tells us that existing capacity is full. There’s a financial incentive to refine more fuel, but current capacity has reached its limit. Refining capacity has also been impacted by the Russia-Ukraine conflict.
Strategic Reserves: Masking True Energy Costs
On one side, it is clear why the price of refined fuel is up. But why has the price of crude oil not increased as much? Here is where inventories come into play. The US has been releasing stocks of crude oil from its strategic petroleum reserve (SPR). Since the beginning of the conflict, SPR inventory has fallen by 116 million barrels. Its current level is just under 300 million barrels, the lowest since 1983.
The role of inventories
The steady release of crude oil inventories has prevented oil prices from going up as much as the price of refined fuel. China has also likely been releasing crude oil inventories. It currently holds the largest strategic petroleum reserve of any country. Thus, the combination of refining capacity constraints and crude oil inventory releases has pushed the crack spread up to record highs.
India’s Domestic Buffer
From India’s perspective, the lower crude oil price and larger crack spread is mixed. On the one hand, the cost of refined fuel is high for consumers. On the other hand, India refines most of its fuel. This means the high crack spread doesn’t affect the import bill. That becomes revenue for domestic refineries. The steady release of crude oil inventories has helped the macroeconomic situation.
How long will the current situation last? It will last as long as crude oil inventories are released into the market. Once that process stops, the price of crude oil will catch up to the price of refined fuel. The crack spread will come back down.
The next question is how long crude oil inventories can be drawn down. This is more complicated and partly depends on policy decisions. The US could choose to continue to draw down inventory levels, but at some point, they will decide to stop doing so. We don’t know when exactly this occurs. In the case of China, it is not clear how many barrels have been released, or how many more they are willing to release. Again, it is a policy choice.
This of course assumes that supply from the gulf remains low. That may change if there is a resolution to the West Asia conflict. In fact, the last time the energy markets approached a difficult situation, the conflict eased. Oil started flowing again, though it was temporary.
Disclaimer:
Note: The purpose of this article is to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly encouraged to consult your advisor. This article is for strictly educative purposes only.
Asad Dossani is an assistant professor of finance at Colorado State University. His research covers derivatives, forecasting, monetary policy, currencies, and commodities. He has a PhD in Economics. He has previously worked as a research analyst at Equitymaster, and as a financial analyst at Deutsche Bank.