1. 321 Crack Spread Calculation
2. Nymex 321 Crack Spread
3. 321 Crack Spread 2018
4. 321 Crack Spread Bloomberg
5. Wti 321 Crack Spread

Crack spread is a term used on the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it. The spread approximates the profit margin that an oil refinery can expect to make by 'cracking' the long-chain hydrocarbons of crude oil into useful shorter-chain petroleum products.

In the futures markets, the 'crack spread' is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more derivative products, typically gasoline and heating oil. Oil refineries may trade a crack spread to hedge the price risk of their operations, while speculators attempt to profit from changes in the oil/gasoline price differential.

Crack spreads are a major indicator of refiner earnings and valuations. Read up on the basics of crack spreads in our special crack spread primer series. Crack spreads are a major indicator of. HollyFrontier Corporation Regional Crack Spread Index 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18. 371,000 432,000 467,000 455,000 461,000 415,000 463,000 442,000 410-420K.

Factors affecting the crack spread[edit]

One of the most important factors affecting the crack spread is the relative proportion of various petroleum products produced by a refinery. Refineries produce many products from crude oil, including gasoline, kerosene, diesel, heating oil, aviation fuel, bitumen and others. To some degree, the proportion of each product produced can be varied in order to suit the demands of the local market. Regional differences in the demand for each refined product depend upon the relative demand for fuel for heating, cooking or transportation purposes. Within a region, there can also be seasonal differences in demand for heating fuel versus transportation fuel.

The mix of refined products is also affected by the particular blend of crude oil feedstock processed by a refinery, and by the capabilities of the refinery. Heavier crude oils contain a higher proportion of heavy hydrocarbons composed of longer carbon chains. As a result, heavy crude oil is more difficult to refine into lighter products such as gasoline. A refinery using less sophisticated processes will be constrained in its ability to optimize its mix of refined products when processing heavy oil.

• The 3:2:1 crack spread calculation starts with the spot price for two barrels of gasoline, added to the spot price for one barrel of heating oil, and then subtracts the spot price for three barrels of WTI crude oil.
• Because the 3:2:1 crack spread is a product of the interplay of three commodity prices, each subject to different but interconnected supply and demand balances, the range of values can vary widely. Product supply shortages resulting from serious disruptions such as hurricanes or other refinery or pipeline outages can cause large spikes.

Futures trading[edit]

For integrated oil companies that control their entire supply chain from oil production to retail distribution of refined products, their business provides a natural economic hedge against adverse price movements. For independent oil refiners which purchase crude oil and sell refined products in the wholesale market, adverse price movements can present a significant economic risk. Given a target optimal product mix, an independent oil refiner can attempt to hedge itself against adverse price movements by buying oil futures and selling futures for its primary refined products according to the proportions of its optimal mix.

For simplicity, most refiners wishing to hedge their price exposures have used a crack ratio usually expressed as X:Y:Z where X represents a number of barrels of crude oil, Y represents a number of barrels of gasoline and Z represents a number of barrels of distillate fuel oil, subject to the constraint that X=Y+Z. This crack ratio is used for hedging purposes by buying X barrels of crude oil and selling Y barrels of gasoline and Z barrels of distillate in the futures market. The crack spread X:Y:Z reflects the spread obtained by trading oil, gasoline and distillate according to this ratio. Widely used crack spreads have included 3:2:1, 5:3:2 and 2:1:1.^[1] As the 3:2:1 crack spread is the most popular of these, widely quoted crack spread benchmarks are the 'Gulf Coast 3:2:1' and the 'Chicago 3:2:1'.^{[citation needed]}

321 Crack Spread Calculation

Various financial intermediaries in the commodity markets have tailored their products to facilitate trading crack spreads. For example, NYMEX offers virtual crack spread futures contracts by treating a basket of underlying NYMEX futures contracts corresponding to a crack spread as a single transaction.^[2] Treating crack spread futures baskets as a single transaction has the advantage of reducing the margin requirements for a crack spread futures position. Other market participants dealing over the counter provide even more customized products.

The following discussion of crack spread contracts comes from the Energy Information Administration publication Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity Industries:^[3]

Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products. Because refiners can reliably predict their costs other than crude oil, the spread is their major uncertainty. One way in which a refiner could ensure a given spread would be to buy crude oil futures and sell product futures. Another would be to buy crude oil call options and sell product call options. Both of those strategies are complex, however, and they require the hedger to tie up funds in margin accounts.

To ease this burden, NYMEX in 1994 launched the crack spread contract. NYMEX treats crack spread purchases or sales of multiple futures as a single trade for the purposes of establishing margin requirements. The crack spread contract helps refiners to lock-in a crude oil price and heating oil and unleaded gasoline prices simultaneously in order to establish a fixed refining margin. One type of crack spread contract bundles the purchase of three crude oil futures (30,000 barrels) with the sale a month later of two unleaded gasoline futures (20,000 barrels) and one heating oil future (10,000 barrels). The 3-2-1 ratio approximates the real-world ratio of refinery output—2 barrels of unleaded gasoline and 1 barrel of heating oil from 3 barrels of crude oil. Buyers and sellers concern themselves only with the margin requirements for the crack spread contract. They do not deal with individual margins for the underlying trades.

Nymex 321 Crack Spread

An average 3-2-1 ratio based on sweet crude is not appropriate for all refiners, however, and the OTC market provides contracts that better reflect the situation of individual refineries. Some refineries specialize in heavy crude oils, while others specialize in gasoline. One thing OTC traders can attempt is to aggregate individual refineries so that the trader’s portfolio is close to the exchange ratios. Traders can also devise swaps that are based on the differences between their clients’ situations and the exchange standards.

321 Crack Spread 2018

References[edit]

1. ^Petroleum Refining Overview
2. ^See NYMEX Crack Spread Handbook (archived)
3. ^See subsection Crack Spread Contracts of chapter 3 'Managing Risk With Derivatives in the Petroleum and Natural Gas Industries'

321 Crack Spread Bloomberg

Crack spread refers to the overall pricing difference between a barrel of crude oil and the petroleum products refined from it. It is an industry-specific type of gross processing margin. The “crack” being referred to is an industry term for breaking apart crude oil into the component products, including gases like propane, heating fuel, gasoline, light distillates like jet fuel, intermediate distillates like diesel fuel and heavy distillates like grease. The price of a barrel of crude oil and the various prices of the products refined from it are not always in perfect synchronization. Depending on the time of year, the weather, global supplies and many other factors, the supply and demand for particular distillates results in pricing changes that can impact the profit margins on a barrel of crude oil for the refiner. To mitigate pricing risks, refiners use futures to hedge the crack spread. Futures and options traders can also use the crack spread to hedge other investments or speculate on potential price changes in oil and refined petroleum products.

Wti 321 Crack Spread

Breaking Down Crack Spread

The traditional crack spread plays used to hedge against these risks involves the refiner purchasing oil futures and offsetting the position by selling gasoline, heating oil or other distillate futures that they will be producing from those barrels. Refiners can use this hedge to lock in profit. Essentially, refiners want a strong positive spread between the price of barrel of oil and the price of the refined products, meaning a barrel of oil is significantly cheaper than the refined products. To find out if there is a positive crack spread, you take the price of a barrel of crude oil - in this case, WTI at $51.02/barrel, for example - and compare it to your chosen refined product - let's say RBOB gasoline futures at $1.5860 per gallon. There are 42 gallons per barrel, so a refiner gets $66.61 for every barrel of gasoline for a crack spread of $15.59 which can be locked in with future contracts. This is the most common crack spread play, and it is called the 1:1 crack spread.

Of course, it is a bit of an oversimplification of the refining process as one barrel of oil doesn't make exactly one barrel of gasoline and, again, different product mixes are depending on the refinery. So there are other crack spread plays where you buy three oil futures and then match the distillates mix more closely as two barrels worth of gasoline contracts and one worth of heating oil for example. These are known as 3:2:1 crack spreads and even 5:3:2 crack spreads, and they can also be used as a form of hedging for investment in refiners themselves. For most traders, however, the 1:1 crack spread captures the basic market dynamic they are attempting to trade on.

Trading the Crack Spread

Generally, you are either buying or selling the crack spread. If you are buying it, you expect that the crack spread will strengthen, meaning the refining margins are growing because crude oil prices are falling and/or demand the refined products are growing. Selling the crack spread means you expect that the demand for refined products is weakening or the spread itself is tightening due to changes in oil pricing, so you sell the refined product futures and buy crude futures.

Reading the Crack Spread as a Market Signal

Even if you aren't looking to trade the crack spread itself, it can act as a useful market signal on potential price moves in both the oil and refined product market. If the crack spread widens significantly, meaning the price of refined products is outpacing the price of oil, many investors see that as a sign that crude oil will eventually rise in price to tighten the spread back up to historical norms. Similarly, if the spread is too tight, investors see that as a sign that refiners will slow production to tighten supply to a level where the demand will restore their margins. This, of course, has a dampening effect on the price of crude oil. So, whether you intend to trade it or not, the crack spread is worth keeping an eye on as a market signal.