Crack Spreads

A crack spread is the difference between the price of crude oil and the prices of the products refined from it, mainly gasoline and diesel (heating oil). The name comes from "cracking", the refining process that breaks crude into lighter products. The crack spread approximates a refinery's gross profit margin. Refiners use crack spread futures to lock in margins, and traders use them to bet on refining economics, fuel demand and supply disruptions.

The basic idea#

Refiners buy crude oil and sell gasoline and diesel. Their margin depends on the gap between input and output prices, not on the oil price level itself. A refiner that is long crude (buying) and short products (selling) is exposed to the crack spread.

Units#

Crude oil is quoted in dollars per barrel; NYMEX gasoline (RBOB) and heating oil (ULSD) are quoted in dollars per gallon. There are 42 gallons in a barrel, so product prices are multiplied by 42 to compare.

product price per barrel = price per gallon × 42

Common crack spreads#

Worked example#

What moves crack spreads#

In 2022, after Russia's invasion of Ukraine disrupted diesel supplies, diesel crack spreads rose to historically high levels. Hurricane related Gulf Coast refinery outages have also caused sharp jumps in gasoline cracks. See Energy Markets and Gasoline and Heating Oil.

Who trades crack spreads#

• Refiners hedge margins, often selling crack spreads when margins are high.
• Airlines and trucking firms hedge fuel costs against crude.
• Speculators trade views on demand, outages and seasonal patterns.
• Arbitrageurs link crack spreads across regions, such as US Gulf Coast and Europe.

Reverse crack#

Selling crude and buying products, the reverse crack, profits if refining margins narrow. Traders use it when they expect product inventories to build or demand to weaken.

Trading crack spreads#

CME lists crack spread contracts and allows the legs to be traded as a single spread with margin benefits. Traders still need to watch:

• Different expiries: crude and product contracts expire on different schedules. See Contract Months and Expiration.
• Seasonal specifications: gasoline blends change between summer and winter grades, which affects RBOB spreads.
• Regional differences: WTI based cracks differ from Brent based cracks.

Frequently asked questions#

What is a crack spread?#

The difference between the price of crude oil and the prices of refined products such as gasoline and diesel, representing refining margins.

What is a 3:2:1 crack spread?#

A spread using 3 barrels of crude against 2 barrels of gasoline and 1 barrel of heating oil, approximating a typical refinery's output.

Why do crack spreads widen?#

Usually because of strong fuel demand, refinery outages or low product inventories, which push product prices up relative to crude.

Next, learn the soybean processing spread in Crush Spreads.