3.4.2.3. Crack Spread
Crack spreads measure the difference between the purchase price of crude oil and the selling price of wholesale petroleum prices, such as gasoline and diesel fuel. The term “cracking” describes the process used to turn crude oil into its refined products.
Crack spreads can be a simple 1:1 spread between a single input (crude oil) and a single refined product. Or they can include multiple outputs, such as the 3:2:1 crack spread (3 crude oil contracts, 2 gasoline contracts, 1 distillate contract). Like crude oil futures, crack spreads are measured in dollars per barrel. The refined products are measured in dollars per gallon. At 42 gallons per barrel, a gasoline or distillate contract of 42,000 gallons is equivalent to 1,000 barrels, the number of barrels in a crude oil contract.
To calculate the “crack,” or the gross cracking margin of a 3:2:1 crack spread, add the spot price for 2 barrels of gasoline (84 gallons) to the spot price of 1 barrel of distillate. Then subtract the spot price of three barrels of crude oil and divide by three to get dollars per barrel.
Sample Question
If heating oil on the spot market costs $1.50 per gallon and gasoline $1.70 per gallon, and if crude oil costs $54 per barrel, what is the gross cracking margin of a 3:2:1 crack spread?
Answer: $14.60 per barrel. The input for the crack spread is composed of three contracts of crude oil. The outputs are two contracts of gasoline and one contract of heating oil. The futures contract for both heating oil and gasoline are composed of 42,000 gallons, equivalent to 1,000 barrels of oil, or 42 gallons per barrel. To arrive at the cracking margin, one must first subtract the per-barrel price of the input from the per-barrel price of the outputs as shown in the table below.
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