Crack
What Is a Crack?
A crack, or crack spread, is a term utilized in the energy markets to address the differences between crude oil and the prices of the wholesale petroleum products that get from it, for example, stream fuel, lamp oil, home heating oil, and gas.
Crack or crack spread is a trading strategy utilized in energy futures to lay out a refining margin. Crack is one primary indicator of oil refining companies' earnings. Crack permits refining companies to hedge against the risks associated with crude oil and those associated with petroleum products.
By at the same time purchasing crude oil futures and selling petroleum product futures, a trader is endeavoring to lay out an artificial position in the refinement of oil made through a spread.
Figuring out a Crack
The term crack is derived from the liquid reactant cracking of crude oil, which is utilized to refine crude oil into petroleum products, like gas and heating oil. Crack is a simple calculation that is much of the time used to estimate refining margins and depends on a couple of petroleum products delivered in a refinery. In any case, crack doesn't think about treatment facilities' incomes and costs, just the cost of the price per barrel of crude oil.
The comparison between the prices of crude oil to those of refined products could show the market's supply condition. A crack spread is commonly a hedge made by going long in oil futures while shorting fuel and heating oil futures.
Factors That Affect Cracks
The extents of petroleum products a refinery produces from crude oil can likewise influence crack spreads. A portion of these products incorporate black-top, aviation fuel, diesel, gas, and lamp oil. At times, the extent delivered differs in light of demand from the nearby market.
The mix of products additionally relies upon the sort of crude oil handled. Heavier crude oils are more challenging to refine into lighter products like gas. Treatment facilities that utilization simpler refining processes might be restricted in their capacity to create products from heavy crude oil.
Instances of a Crack
Single Product Crack
A single product crack mirrors the difference between the prices of one barrel of crude oil and one barrel of a predetermined product. For instance, a crude oil purifier accepts that fuel prices will stay strong throughout the next two months and wishes to lock in the margins now. In February, the purifier sees that May West Texas Intermediate (WTI) crude oil futures are trading at $45 per barrel and June New York Harbor RBOB gas futures are trading at $2.15 per gallon, or $90.30 per barrel. The purifier accepts this is a great single product crack spread of $45.30 per barrel, or $90.30 - $45.
Since purifiers purchase crude oil to refine the commodity into a petroleum product, the purifier chooses to purchase the May WTI crude oil futures while at the same time selling the June RBOB fuel futures. Thus, the purifier has locked in a crack of $45.30.
Various Product Crack
Purifiers and investors additionally carry out crack strategies on different products. For instance, a purifier plans to hedge against the risk of expanding WTI crude oil prices and falling petroleum product prices. The purifier could hedge the risk with the 3-2-1 crack spread.
Utilizing similar futures prices and expiration dates for WTI crude oil and RBOB fuel, the purifier could purchase three crude oil futures contracts and sell two RBOB gas futures contracts. Accepting that June heating oil futures are trading at $1.40 per gallon, or $58.80 per barrel, the purifier would likewise sell one futures contract on the commodity. Thus, the purifier locks in an ideal margin of $34.80 per barrel, or ($58.80 + 2 * $90.30 - 3 * $45)/3.
Features
- The term crack is derived from the liquid synergist cracking of crude oil, which is utilized to refine crude oil into petroleum products
- Trading crack spreads permit purifiers to hedge their price risk.
- The extents of petroleum products a refinery produces from crude oil can likewise influence crack spreads. A portion of these products incorporate black-top, aviation fuel, diesel, gas, and lamp oil.
- A single product crack mirrors the difference between the prices of one barrel of crude oil and one barrel of a predetermined product. Purifiers and investors likewise carry out crack strategies on numerous products.
