Crack Spreads?

Discussion in 'Commodity Futures' started by njchino371, Mar 6, 2008.

  1. "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 put options. Both of those strategies are complex, however, and they require the hedger to tie up funds in margin accounts."

    That's from wiki, but isn't the futures strategy different from the options strategy?

    Anyone trade this spread? Can you provide some insight on how you trade it?
  2. you can trade the crack via the nymex floor or you can trade the RBOB spread selling 3 CL contract and buying 2 RBOB contract if you are long.

    If you want to go long the full crack (3-2-1), then you should sell 3 CL contracts, buy 2 RBOB contract and long 1 HO contract.

    crack spread calculation is like this.

    (Assume gasoline is $2,613 per gallon, heating oil is $2,933 per gallon And the Crude oil is trading at $104.13)

    $2,613 per gallon of RBOB x 42= $109.746 per barrel of gasoline x two barrels = $219.49

    $2,933 per gallon of Heating Oil x 42 = $123.18 per barrel of heating oil

    The sum of the products is:
    $219.49 + 123,18= $342.67

    Three barrels of crude ($104.13 x 3) = $312.39

    Therefore, the gross cracking margin is $342.67- $312.39= $30.28

    The 3:2:1 crack spread is trading at ($30.28/3 barrels) = $10.09 per barrel at this moment.

    BTW: IF im going to trade the crack I will buy/sell may April crude contract and I will trade the May gasoline and heating oil contract. Because refining takes time, Is a good idea to use the crude oil contract for one month and the products contract of the next month.
  3. Hey,

    Thanks for the reply. I'm really new to the oil market, so can you explain to me what trading the spread means on a macro level. For example, what is one implicating when he's long the spread or short the spread.

    If you're bullish on the spread, are you basically saying that the refiner is making a higher margin with its refined oil products, or that crude is dropping in price?

    I guess what I'm trying to ask also is, what economic indicators are you looking at to trade this spread?
  4. Not sure how many people trade the 3-2-1 these days, but the heat crack and gas crack are easily traded on the screen. Whatever trading software you use should have a symbol for the heat and gasoline cracks, which are just (HO*42) - CL or (RB*42) - CL. Right now the April RBOB crack is trading 6.50 on the screen and the April heat crack is 18.90 on the screen.