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Thoughts from Last Week
This week’s chart shows the “crack spread,” which is the difference between the purchase price of crude oil and the selling price of gasoline.
Last Friday, the May CPI report showed that inflation, as measured by the Consumer Price Index (CPI), increased 8.6% y/y. Core CPI, which excludes food and energy CPI, increased 6.0% y/y. Relative to April, Headline and Core CPI rose 1% and 0.6%, respectively. Prices continue to increase across all segments but energy remains the biggest pain point; supply constraints and bans on Russian oil have pushed energy prices higher, with crude oil prices rising above $120/barrel last week.
Given the backdrop of persistently high energy prices, it is no surprise that Energy is the only S&P 500 sector with positive year-to-date returns. This outperformance can largely be attributed to the sector’s ability to preserve profit margins. This week’s chart shows the “crack spread,” which is the difference between the purchase price of crude oil and the selling price of gasoline. Put differently, it is a proxy for tracking the short-term profit margins of refinery companies. The spread has trended above its 3-year average since the start of the calendar year as higher oil prices, wages and transportation costs have led to an increase in the price of gasoline.
Looking ahead, energy sector profitability will hinge on consumption, which has remained resilient for the time being. However, with growth slowing and the Fed becoming more hawkish, consumption may soften, particularly if unemployment rises and savings are depleted, but oil prices remain high.