What is crack spread?

The crack spread refers to the difference between the price of crude oil and the prices of refined products.

The typical spread ratio is to buy three crude oil contracts and sell two gasoline contracts plus one heating oil contract (3:2:1).

This price difference represents the yield of "cracking" 1 unit of crude oil.

A crack spread is a difference in price between a refined product (or group of products) and crude oil.

It is used as a rough indicator of market conditions, roughly approximating the margin from processing light sweet crude through a cracking configuration refinery.

Typically, a crack is defined in terms of one specific product versus one detailed crude. For example, the diesel cracks on Brent. In this case, it is meant to indicate how much the individual product's price is contributing to refining profitability.

Some more complicated cracks are used to provide a somewhat more accurate indicator of overall refining margin:

  • 3-2-1 crack - Defined as (2 x gasoline price + 1 x diesel price) - (3 x crude price)
  • 6-3-2-1 crack - Defined as (3 x gasoline price + 2 x diesel price + 1 x fuel oil price) - (6 x crude price)