Crack Spread Explained 2025: Key Factors, Examples & Trading Prices

What Is a Crack Spread?

A crack spread represents the price difference between crude oil and its derived petroleum products, such as gasoline, jet fuel, kerosene, and heating oil. This term originates from the fluid catalytic cracking process used in refineries to convert crude oil into these valuable products.

In energy futures markets, a crack spread is a popular trading strategy employed to estimate and secure refining margins. It enables refiners to manage risks associated with fluctuating crude oil prices and the prices of refined products by simultaneously buying crude oil futures and selling futures of petroleum products.

Key Insights

• The term 'crack' comes from the catalytic cracking process in oil refining.
• Crack spreads help refiners hedge against price volatility.
• Single product crack spreads compare the price of one barrel of crude oil to one barrel of a specific petroleum product.
• Multi-product crack spreads account for various refined products like diesel, gasoline, asphalt, and aviation fuel, influenced by refinery output proportions.

Understanding Crack Spreads in Depth

Crack spreads are a straightforward way to gauge refining profitability, focusing on the price gap between crude oil and one or more petroleum products. While they provide a useful margin estimate, crack spreads do not factor in all refinery operating costs or revenues.

Typically, traders create crack spread hedges by going long on crude oil futures and short on futures for gasoline and heating oil, reflecting market supply and demand dynamics.

What Influences Crack Spreads?

The types and quantities of petroleum products a refinery produces significantly impact crack spreads. Local market demand can shift production ratios, while the quality of crude oil—light or heavy—affects refining complexity and product output.

Refineries with simpler processes may face limitations in converting heavy crude into lighter, high-value products like gasoline, which in turn influences crack spreads.

Practical Examples of Crack Spreads

Single Product Crack Spread

Consider a refiner in February 2024 observing May West Texas Intermediate (WTI) crude oil futures priced at $45 per barrel and June New York Harbor RBOB gasoline futures at $2.15 per gallon (equivalent to $90.30 per barrel). The refiner anticipates strong gasoline prices and locks in a crack spread of $45.30 per barrel ($90.30 minus $45) by buying May crude futures and selling June gasoline futures simultaneously.

Multiple Product Crack Spread

For broader risk management, refiners might use a 3-2-1 crack spread strategy. For example, purchasing three crude oil futures contracts while selling two RBOB gasoline and one heating oil futures contract. If June heating oil futures trade at $1.40 per gallon ($58.80 per barrel), the refiner secures a margin of $34.80 per barrel calculated as ($58.80 + 2 × $90.30 – 3 × $45) divided by 3.

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