Jun

7

The market spent three months pricing the barrel. The next 90 to 180 days will be decided by the products refined from it.

Crude shock is now understood; product shock is not. Since the effective closure of the Strait of Hormuz, attention has shifted to crude oil. Brent peaked at roughly $138 in early April and now trades in the low $100s, with WTI in the high $90s and the Brent–WTI spread near $10–$12 a barrel, wider than its customary $4–$6. That is the visible price. The less visible, more consequential story over the next 90 to 180 days is what happens to the products refined from crude — jet fuel, gasoline, diesel, and fuel oil. Crude can be rerouted; refined products are produced by configured refineries, and refineries sit at the far end of a supply chain measured in weeks, not hours.

“Energy independent” describes volume, not chemistry. The United States produces more crude than it consumes, but the crude it produces is the wrong type for the products it needs. Shale oil recovered by fracking is very light and sweet; it yields LPG, naphtha, gasoline, and some kerosene, but little of the middle distillates — diesel and jet — and almost none of the residual fuel oil that a complex economy runs on. Those heavier products require medium and heavy sour crude: the grades that flow from the Persian Gulf, Canada, and Latin America, and that Gulf Coast refineries were built to process. The Hormuz closure removes medium and sour barrels from the global pool — precisely the barrels whose yield is weighted toward diesel and fuel oil. That puts a premium on the heavy crude the US can still reach — and Canada is the backbone of it: heavy, sour Western Canadian barrels piped straight to US refineries, by far the largest single source of US crude imports. With Venezuela unable to raise output quickly and Mexican volumes in slow decline, Canadian crude and the sour grades released from the Strategic Petroleum Reserve must carry more of the load. So even as crude prices ease from their peak, the product slate can tighten because the marginal barrel lost is the one that produced the scarce products.

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