Crack spread is a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it - that is, the profit margin that an oil refinery can expect to make by "cracking" crude oil (breaking its long-chain hydrocarbons 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 a change in the oil/gasoline price differential.
Factors affecting the crack spread
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, asphalt
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.
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