The 3:2:1 crack spread
321 Crack Spread Quote
The benchmark US Gulf Coast 3:2:1 crack spread increased by 8% in the week ended July 20, hitting $22.846 per barrel on Monday. On the previous Monday, July 13, the spread was $21.166 per barrel.
The chart above illustrates the US Gulf Coast 3:2:1 crack spread over the last few days. The 3:2:1 crack spread reflects a theoretical calculation for the difference between the price of two barrels of gasoline and one barrel of distillate fuel and the cost of three barrels of crude oil that these products are assumed to be produced from.
Crack spreads usually increase when product prices increase by more than the price of crude oil or when the price of crude oil falls by more than product prices. The latter was the case in the week ended July 20. WTI crude oil prices fell by ~4% while both gasoline and diesel prices fell by 1%. Read the previous parts of this series for detailed commentary about price movements.
Crack Spreads Continue To Support Crude Oil. The crack spread was already trading at $16 in a sign that recovery was coming soon for the bearish price action in the crude oil futures market. Easily create spread chart graphs using this simple online feature. Choose from a number of standard spreads, including Crack Spread and Crush spread, or create your own custom commodity spread using the simple spread formula editor. Find information for RBOB Gasoline Crack Spread Futures Quotes provided by CME Group.
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. What Crack Spreads Say About Oil Prices. The crack spread is a term used both in the oil industry as a tool for producers to hedge their P&L and for futures trading as speculators trade the. The CRACK spread study is a futures transaction that parallels the process of refining Light Crude Oil (CL) into petroleum products, such as Heating Oil (HO) and Unleaded Gas (HU). Since the refining process involves “cracking” crude oil into its major components, the spread is referred to as a crack.
Why watch crack spreads?
Crack spreads represent the price difference between refiners’ revenues—derived from the sale of finished refined products—and refiners’ costs—the price of crude oil. So they’re an important metric that drives refiner profitability and market valuation. This is something investors in refiner stocks should watch.
A wider crack spread increases the profit margins of refiners such as Valero Energy (VLO), Phillips 66 (PSX), Marathon Petroleum (MPC), and Tesoro (TSO). It enables them to purchase raw materials or inputs—crude oil—at a lower rate and sell the refined products—gasoline and diesel—at higher prices.
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Together, the companies mentioned above make up 8% of the iShares U.S. Energy ETF (IYE).
These refiners have spun off some of their midstream assets to form MLPs, including Valero Energy Partners (VLP), Phillips 66 Partners (PSXP), MPLX LP (MPLX), and Tesoro Logistics (TLLP). A higher crack spread also indirectly benefits these companies. Higher volumes produced by their refining parents—if they choose to take advantage of the higher margins—would mean more volume to transport. This would boost these MLPs’ revenues.
For more on crack spreads, read Crack Spread 101 Part 1: What’s a crack spread?
For the latest updates on the energy sector, follow Market Realist’s Energy and Power page.
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