Oil markets have remained highly volatile in 2026, with geopolitical tensions in the Middle East, disruptions to shipping routes and changing expectations over supply repeatedly moving prices in different directions. Much of the attention has naturally focused on Brent crude, which remains one of the most widely followed indicators of global oil-market conditions. However, looking only at Brent may at times provide an incomplete picture, particularly at a time when the prices of refined fuels such as diesel and gasoline have not always moved in line with crude. One useful way to understand this divergence is through the crack spread, which measures the gap between the price of crude oil and the value of the refined products produced from it.
Oil prices have remained volatile while crude and refined products have not always moved the same way.
The current period of oil-market volatility began in late February 2026, when the conflict involving Iran raised concerns about possible disruptions to crude oil flows through the Strait of Hormuz. These fears pushed oil prices higher as markets began to price in the risk of some level of supply disruption.
By June, however, conditions had started to ease with the hope of a peace deal coming through. As a result, part of the geopolitical risk premium built into crude prices appeared to fade, with the price of a barrel of Brent crude oil returning back to the USD 70 mark. Even as crude prices declined, several refined products such as diesel and gasoline did not fall as much, suggesting that pressures further down the supply chain had not eased to the same extent. Then, from late August into early September, renewed geopolitical tensions once again raised concerns over regional oil flows, pushing Brent back above USD 90 per barrel.
Taken together, these developments suggest that the market has moved through three distinct phases: an initial crude supply shock, a period of partial easing, and a renewed rise in geopolitical risk. At the same time the fact that crude oil prices have not moved exactly in the same way as refined products does, this may suggest that the availability of refined fuels may remain tight even when crude market pressures temporarily ease.
What does the Crack Spread show?
This is where crack spreads become useful. In simple terms, refineries buy crude oil and process it into products such as diesel, gasoline and jet fuel. The difference between the price of crude and the value of these refined products is commonly referred to as the crack spread, and although it is not the same as actual refinery profit, it is often used as a broad indication of refining margins.
A widening crack spread can occur for several reasons. Refined product prices may rise, crude prices may fall faster than refined product prices, or both may happen at the same time. During 2026, the IEA has pointed to a some disconnect between crude and refined product markets, with crude conditions appearing to ease at certain points while refined product markets remained relatively tight. This may suggest that some of the pressure has gradually shifted further down the supply chain, which could also indicate refiners raising margins to recover from possible losses.
Why are refining margins remaining high?
Several factors may be contributing to this divergence. Refining activity has been disrupted in a number of regions, while attacks affecting Russian refineries and interruptions to Middle Eastern refined product exports have reduced the amount of finished fuel available to the global market. At the same time, relatively low inventories may have made the market more sensitive to any additional disruption.
Diesel has been particularly affected, partly because it plays an important role in freight, agriculture, construction and industry. In August, the U.S. diesel crack moved above $100 per barrel for the first time, highlighting how tight the market for middle distillates had become relative to crude oil. This does not necessarily mean that demand is exceptionally strong; instead, it may indicate that the supply of refined products has become constrained compared with the availability of crude.
What Does This Mean for the World?
The broader implication is that falling crude prices do not always mean that the energy shock is easing to the same extent for businesses and consumers. If refining capacity remains constrained and supplies of diesel, gasoline and jet fuel remain tight, fuel prices could stay elevated even when Brent softens.
This may continue to affect transport costs, freight charges and production expenses, which could in turn place some upward pressure on inflation. It also means that one should pay closer attention not just on crude oil benchmarks, but also to refining margins, inventories and refined product trade flows when assessing the true impact of changes in the oil market.
What Does This Mean for Sri Lanka?
For Sri Lanka, this distinction may be especially relevant because the country depends on imported energy and is exposed not only to changes in crude prices, but also to the cost of refined petroleum products, freight and the exchange rate. As a result, a decline in Brent may not necessarily lead to an equally large reduction in the country’s petroleum import bill if refined product prices remain high.
Persistently wide crack spreads could therefore limit some of the benefit that Sri Lanka might otherwise receive from lower crude prices. Depending on how long these conditions continue, this may have implications for fuel import costs, foreign-exchange demand, transport expenses and, indirectly, domestic inflation.