Question

What is crack spread and how is it calculated?

Hint: Difference between the price of jet fuel and other products produced from crude oil and the price of crude oil. Barrel of crude oil produces how much jet fuel

Suppose we consider buying oil and selling gasoline and heating oil in August. On June 2, 2004, the July futures price for oil was $39.96/barrel or $0.9513/gallon (42 gallons in a barrel). The August futures price for unleaded gasoline and heating oil were $1.2427/gallon and $1.0171/gallon. The 3-2-1 crack spread means that we can produce from 3 gallons of crude oil 2 gallons of gasoline and 1 gallon of heating oil.

Therefore the “Crack Spread” is

2 x ($1.2427) + $1.0171 – (3 x $0.9514) = $0.6482 * (42)/3 = $9.0748/barrel

Answer 1

Crack spread refers to the overall pricing difference between a barrel of crude oil and petroleum products refined from it.

If a crack spread is a positive then the price of the refined products is higher than that of crude oil and the spread is considered profitable.

If the spread is a negative then the products are priced at less than the cost of crude oil and are not profitable.

It can be taken into combinations of the 3-2-1 (this is in barrel perspective)

3 - three barrels of crude oil

2 - two barrels of gasoline

1 - one barrel of heating oil

Will be explaining with different example ( Note: these are not the correct market prices) :

1 gallon heating oil = $ 5

convert it to a barrel (42 gallons) = $ 210 (So 1 barrel of heating oil)

1 gallon gasoline = $ 3

convert it to a barrel (42 gallons) = $ 126

let us take 2 barrels of gasoline = $ 252

1 barrel of crude oil = $ 30

3 barrels of crude oil = 90

Now it is 3-2-1 combination

crack spread = (210 + 252) - 90 = $ 372