Crack spread
Crack spread
The crack spread is a term used in the oil refining industry to represent the difference between the purchase price of crude oil and the selling price of finished products such as gasoline and heating oil. It is a crucial indicator for refiners as it reflects the profitability of refining crude oil into petroleum products.
Overview[edit | edit source]
The crack spread is typically calculated using futures contracts on the New York Mercantile Exchange (NYMEX). The most common crack spread is the 3-2-1 crack spread, which assumes that three barrels of crude oil are refined into two barrels of gasoline and one barrel of heating oil. The formula for the 3-2-1 crack spread is:
- (2 * Gasoline futures price + 1 * Heating oil futures price - 3 * Crude oil futures price) / 3
Importance[edit | edit source]
The crack spread is an essential metric for refineries as it helps them to hedge against price volatility in the crude oil and refined products markets. By understanding the crack spread, refiners can make informed decisions about production levels, inventory management, and pricing strategies.
Factors Influencing Crack Spread[edit | edit source]
Several factors can influence the crack spread, including:
- Crude oil prices: Fluctuations in crude oil prices directly impact the cost of raw materials for refiners.
- Supply and demand: Changes in the supply and demand for gasoline and heating oil can affect their prices and, consequently, the crack spread.
- Seasonal variations: Demand for heating oil typically increases in the winter, while gasoline demand peaks during the summer driving season.
- Geopolitical events: Political instability in oil-producing regions can lead to supply disruptions and price volatility.
Related Concepts[edit | edit source]
- Refining margin: Similar to the crack spread, the refining margin measures the profitability of refining crude oil into petroleum products.
- Hedging: Refiners use hedging strategies to protect against adverse price movements in the crude oil and refined products markets.
- Futures contract: A standardized contract to buy or sell a specific quantity of a commodity at a predetermined price at a future date.
See Also[edit | edit source]
- Oil refining
- Gasoline
- Heating oil
- New York Mercantile Exchange
- Crude oil
- Refining margin
- Hedging
- Futures contract
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