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The 3:2:1 crack spread (green) has broken above its June 2022 record near $60 to fresh all-time highs near $64, while WTI (blue) trades more than $45 below its own 2022 peak. A closing price back below $57 for the crack spread would be the first sign of compression, opening the path toward the early June congestion near $45.

The three legs of the barrel climbed together until April, but since June they have split, with RBOB (+73%) and ULSD (+67%) holding most of the war rally while crude (+24%) has round-tripped. That widening gap is the record crack spread seen from another angle and it narrows from whichever side moves first.

Silver's parabolic advance ended with a break below the $62 support since December, and the current bounce is a textbook throwback: the breached support now acts as resistance. A daily close back above $62 would negate the breakdown.

Euro FX futures have spent a year carving rising highs against a flat floor near 1.1490 – an ascending broadening formation whose support has now given way.

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In four trading days last week, WTI crude oil traveled from $67.82 – its lowest level since late February – up to $76.08 and back to around $71 by Friday. A 12% spike, half of it given back within two sessions. The 3:2:1 crack spread, which is the standard measure of U.S. refining margins.  did something much simpler: It began the week at a record and ended it at one. When everything moves except the extreme, the extreme is telling you something.

On July 6 and July 7, Iranian forces struck three merchant vessels in the Strait of Hormuz – a Saudi crude tanker and a Qatari gas carrier among them – to enforce shipping rules that Tehran insists it has a sovereign right to impose. Washington responded by revoking Iran's license to sell oil internationally, a key part of the June 14 memorandum, and then with two rounds of strikes on Iran's Hormuz coast. By Wednesday, the memorandum had been declared over. Thirteen tankers crossed the strait that day, against an average of 33 the week before. Crude did what crude does.

Yet by Friday, the paper market had moved on: Crude gave back more than half the spike on hopes of a new settlement in Doha and a dollar at a seven-week high – hopes, we would note, not signatures. Three weeks after the last sheet of paper failed, the market is reaching for the next one. The products barely blinked: ULSD held nearly all of its gains into the weekend, leaving the crack near $62, which is within a dollar of its record. We flagged this margin in early June, at $43 on the gasoline crack, choosing products over crude. That trade has run further than we expected. But a record is where we stop chasing and ask which leg is wrong: A crack spread is not an asset but a relationship – an open claim that either products are too expensive, or crude is too cheap.

The shortage beneath the product legs has not changed. Refinery closures since 2019 have permanently removed more than 1.2 million barrels per day of U.S. processing capacity, before counting the war-damaged plants that the IEA estimates cut global refinery output by 4.5 million barrels per day last quarter. The EIA still expects stocks of the three major transportation fuels to end 2026 at their lowest since 2000, with jet fuel covering the fewest days of demand since 1963. Neither has demand: Gasoline stocks fell 1.9 million barrels in the week to July 3, more than expected, and total fuel consumption ran 3.3% above a year ago. Americans paid some of the highest Independence Day pump prices on record but drove anyway.

A spread this wide still has three exits: demand destroys itself, refining capacity returns or crude reprices. The first two remain hard to find in the data, and a strait under fire is no place to rebuild refinery output. The third exit is the one last week cracked open. One week of reality repriced crude by eight dollars; two sessions of hope unwound half of it. That asymmetry is the message: Product prices rest on a physical shortage that no agreement can fix, while the crude price rests on a diplomacy that has now failed twice in three weeks.

Hence our view is unchanged, merely stress-tested: we favor the short side of the crack spread. If the strait stays hot, crude closes the gap from below, as it briefly did last week. If a settlement genuinely holds, shipping and refinery output will recover, letting product prices ease from above. Only the knife-edge – a conflict that keeps threatening supplies without ever quite disrupting it, indefinitely –  keeps the spread at a record. The June memorandum papered over the cracks for all of three weeks. Whatever the next sheet says, refineries do not run on paper.

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We conclude with the following hypothetical trades:¹

Case study 1: Short 3:2:1 crack spread

If we hold the view that record refining margins are unsustainable, we would consider a short position in the 3:2:1 crack spread by simultaneously selling two RBOB Gasoline (RB) futures at $2.981 per gallon and one NY Harbor ULSD (HO) futures at $3.5400 per gallon, while buying three WTI Crude Oil (CL) futures at $71.27 per barrel. The product basket is worth (2 × 2.981 + 3.5400) × 42 / 3 = $133.028 per barrel, putting the spread at 132.028 – 71.27 = $61.758. We would place the stop-loss above $70, a hypothetical maximum loss of 70 – 61.758 = 8.242 points. With both sides of the trade representing 3,000 barrels, each $1 per barrel move in the spread is worth $3,000, making the hypothetical maximum loss $24,726. Looking at Figure 1, if the spread compresses toward its early June congestion near $45, the position gains 61.758 – 45 = 16.758 points, or $50,274.

We can look at two hypothetical scenarios to understand how the position behaves:

• Scenario 1: The strait stays contested and crude rallies $5 while products hold – the spread compresses to $56.758, a hypothetical gain of 5 × 3,000 = $15,000, delivered entirely by the crude leg, as it briefly was last week.
• Scenario 2: Products extend while crude fades on settlement hopes and the spread widens to $70 – the stop, a hypothetical loss of $24,726.

For a smaller version of the same view, the 1:1 gasoline crack (one RB futures against one CL futures) carries roughly one-third of the exposure.

Case study 2: Short EUR/USD futures

If we hold a bearish view towards the euro, we would consider taking a short position in Euro FX (6E) futures at the current price of 1.145, with a stop-loss above the breached support at 1.155, a hypothetical maximum loss of 1.155 – 1.145 = 0.01 points, or $1,250 per contract. Looking at Figure 4, if the breakdown from the yearlong floor follows through, the euro has the potential to fall to 1.105, resulting in 1.145 – 1.105 = 0.04 points, or $5,000 per contract. Each 0.0001 move is worth $12.50 (contract size 125,000 euros). Micro Euro FX (M6E) futures are also available at 1/10 of the standard size.

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¹ Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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