Are Wall Street Bond Traders Crack Heads?
Now that is a headline grabber…
But we’re actually talking about something quite different: the “crack spread” in the oil patch, which has been getting a lot of attention lately.
Simply put, the crack spread is the difference between the price of crude oil and the price of the products eventually made from it, such as gasoline, diesel and jet fuel.
Think of crude oil as the raw ingredient. It still has to be refined into the fuels that we actually use every day.
And that’s where things get interesting.
Crude oil has recently been trading around the $100-per-barrel neighborhood, while the national average price of diesel was about $6.29 per gallon as of September 14. The difference helps illustrate what is happening beyond the price of crude itself. The U.S. Energy Information Administration has noted tight distillate inventories and elevated diesel crack spreads amid reduced international refinery production. [eia.gov] [eia.gov]
Why should the average American care?
Because diesel helps move an awful lot of things around America. When fuel costs rise, businesses that transport goods, operate equipment or depend heavily on transportation can face higher costs.
That means energy prices remain one of the many factors in the inflation discussion and another piece of the puzzle the Federal Reserve must consider as it manages interest-rate policy.
And higher interest rates have brought bonds back into the conversation as well. With bonds once again offering more meaningful yields, investors have more choices as they consider where to allocate their investment dollars.
So, as the U.S. economy continues juggling inflation, interest rates, energy costs, and affordability, the oddly named “crack spread” may be worth keeping an eye on.
Who knew being a “crack head” could be so educational?
This commentary is provided for informational and educational purposes only and is not intended as investment advice or a recommendation to buy or sell any security. Investments involve risk, including the possible loss of principal.