Brent, West Texas, and Crack
Two Prices, One Market
By Morgan Christen
CFA, CFP, CDFA
In high school, I worked as a Petroleum Transfer Engineer at the Union 76 gas station owned by my friend Jeff’s father. Back then, customers still chose between full service and self-service, along with leaded, unleaded, and diesel. Nothing like trusting a sixteen-year-old to check your oil and tire pressure, what could go wrong? I remember hearing people talk about the cost of oil, but I had no idea what that actually meant. From where I stood, oil was simply what arrived in tanker trucks to fill the underground tanks.
When you are watching CNBC or reading the Journal you may see two different oil prices quoted at the same time, Brent at $95 a barrel, while WTI sits several dollars lower. You have now run into one of the most persistent riddles in commodities: why isn’t oil just one price?
The short answer is that crude oil isn’t a single, uniform product. It’s a family of grades that differ by where they’re pumped, how easy they are to refine, and how far they travel to reach a buyer. Two grades dominate the headlines – Brent Crude and West Texas Intermediate (WTI) – and understanding the gap between them tells you a lot about what’s actually happening in the global economy.
Brent Crude
Brent is a blend of crude extracted from oil fields in the North Sea, between the UK and Norway. It’s become the world’s most widely used benchmark; roughly two-thirds of internationally traded crude contracts are priced off Brent.
Why Brent matters globally:
- It’s seaborne, meaning it can move by tanker to virtually any refinery on the planet. Europe, Asia, or wherever demand (and price) is highest.
- Its price reflects global supply and demand, including geopolitical risk from the Middle East, shipping chokepoints like the Strait of Hormuz, and OPEC+ production decisions.
- It’s classified as “light” and “sweet” – meaning low density and low sulfur, which makes it relatively easy and cheap to refine into gasoline and diesel.
West Texas Intermediate (WTI)
WTI is the benchmark for U.S. crude, pumped primarily from Texas, New Mexico, and the broader Permian Basin, with pricing and delivery settled at Cushing, Oklahoma – a landlocked storage and pipeline hub.
Why WTI trades differently:
- It’s even lighter and sweeter than Brent, technically making it easier to refine.
- But it’s landlocked. Unlike Brent, WTI has historically depended on pipeline capacity to reach refineries or export terminals, which can create bottlenecks that Brent simply doesn’t face.
- Because of pipeline buildouts over the last decade, the U.S. now exports significant volumes of WTI, so it’s become more globally connected than it used to be, but it still trades primarily off North American supply and demand.
The Brent-WTI Spread
Even though WTI is technically a slightly higher-quality crude, it doesn’t necessarily trade at a premium. In practice, Brent usually trades above WTI. Traders call this gap the Brent-WTI spread, and it moves for a few key reasons:
- Access to the sea. Brent can reach any global buyer by tanker; WTI’s landlocked position means transportation costs and pipeline constraints get baked into its price.
- Geopolitical risk exposure. Brent is far more sensitive to Middle East tensions and shipping-lane disruptions, since so much internationally traded oil passes through those chokepoints. WTI is more insulated, reflecting primarily U.S. supply, storage levels at Cushing, and shale production economics.
- Regional supply gluts or shortages. A surge in U.S. shale output can push WTI down relative to Brent; a disruption to North Sea production can do the reverse.
As of late July 2026, that dynamic is on full display, Brent has climbed toward the mid-$90s per barrel amid escalating geopolitical tensions in the Middle East, while WTI, more insulated from that specific risk, has moved by a smaller margin. Widening spreads like this are usually a signal that global supply risk, rather than plain domestic supply and demand, is driving the market.
Enter the Refinery
Crude oil, whether Brent or WTI, isn’t useful to anyone in its raw form. It must be refined by heating, distilling, and chemically processing into products people and businesses actually buy: gasoline, diesel, jet fuel, heating oil, and petrochemical feedstocks (plastics and fertilizers). Essentially “cracking” the crude. More formally the refining process (“catalytic cracking”) is breaking down raw crude oil molecules into useful fuels.
A refiner’s basic business model is simple in concept:
Buy crude oil → Refine it → Sell the finished products for more than the crude cost.
The profit margin in that equation has a name: “crack spread.”
The crack spread is the difference between the price of crude oil and the combined price of the refined products it’s made from. It’s essentially the refining industry’s gross margin, and it’s one of the most closely watched numbers in energy markets because it tells you whether refining is currently a profitable business, regardless of whether crude prices are high or low.
The most common version is the “3-2-1” crack spread, which approximates a typical refinery yield:
- 3 barrels of crude oil in
- Refined into 2 barrels of gasoline
- And 1 barrel of distillate (diesel/heating oil)
Nerd Alert: The formula looks like this:
3-2-1 Crack Spread = (2 × Gasoline price + 1 × Diesel price) − (3 × Crude oil price), divided by 3
If gasoline and diesel prices rise faster than crude, the crack spread widens refiners are making more money per barrel processed. If crude spikes faster than refined product prices can follow, the spread narrows or even goes negative, squeezing refiner margins.
A few reasons the crack spread moves:
- Seasonal demand – gasoline cracks typically widen heading into summer driving season; diesel cracks can widen in winter with heating demand. Hello California.
- Refinery capacity and outages – a refinery fire, hurricane, or scheduled maintenance season reduces the supply of refined products even if crude supply is untouched, widening the spread.
- Crude quality – this is where Brent versus WTI comes back in. A refinery configured for light, sweet crude generally handles WTI (or Brent) efficiently. A refinery built for heavier, sour crude blends might get a better crack spread from a different, cheaper grade entirely.
As of mid-2026, Gulf Coast crack spreads for products like high-sulfur fuel oil against Brent have been running negative, a reminder that not every refined product carries a positive margin against every crude benchmark. It depends heavily on the specific product slate a refinery is optimized to produce.
Conclusion
Gas prices are elevated right now for two reasons, crude oil is more expensive, and the margin refiners charge to turn it into gasoline has also widened (they go up like a rocket and come down like a feather).
Here’s how those pieces are stacking up as of late July 2026:
1. The crude oil input cost has jumped. Brent crude surged toward $95/barrel late July, its highest level in weeks, in response to the escalating conflict between the U.S. and Iran. With their ceasefire effectively abandoned, military strikes now appear to be hitting infrastructure as well as military targets, which has raised fears of a real supply disruption. Since gasoline is refined from crude, a higher crude price mechanically raises the floor under pump prices before refiners even touch a barrel.
2. The refining margin (crack spread) has widened too and that’s the bigger recent mover. Gasoline futures climbed faster than crude itself late July, hitting their highest level since May, because:
- U.S. refiners have been shifting production toward diesel and jet fuel, which currently carry fatter margins, and that’s coming at the expense of gasoline output.
- Gasoline inventories fell in the most recent EIA (Energy Information Administration) report and now sit well below their five-year seasonal average – the lowest for this time of year since 2012.
- Separately, Ukrainian strikes on Russian refining infrastructure are tightening the global refined-products market, not just the crude market.
Put it all together, and the national average price of gas is running around $4.06/gallon (California wishes), up sharply from about $3.14 a year ago. That increase reflects both a pricier input (crude, driven by Middle East risk) and a wider markup (the crack spread, driven by refiners chasing diesel/jet margins and tightening gasoline stockpiles). When both halves of the equation move up at once, like they are now, the pump price moves faster than crude alone would suggest.
Takeaway
This month’s newsletter is a bit different from the usual newsletter; less of a market commentary than a reminder that energy prices influence nearly every part of the economy. Oil and gasoline costs affect consumer spending, consumer confidence, and inflation. When inflation remains elevated, interest rates tend to stay higher for longer.
For those waiting for mortgage rates to fall significantly, patience may not be rewarded as quickly as hoped. Paying down credit cards and other high-interest debt remains a solid move. For long-term investors, however, both stocks and real estate have historically served as effective hedges against inflation.
We thank you for your continued support and welcome your comments. Please feel free to reach out to us should you have any questions on the economy or your portfolio, we are happy to chat.
Now Live:
Spinnaker Market Alerts
We look forward to sharing breaking information with you, only when it matters. If you did not receive a text from us and you are interested in receiving Market Alerts, you can sign up by completing the form here.
Have You Taken
The SpinnCycle™?
A quick reality check for your portfolio
Enter the SpinnCycle and find your SpinnScore™
Spinnaker Mobile App now Available for iOS and Android
