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When refiners look to hedge their crack spread risk, they typically are naturally long the crack spread as they continuously buy crude oil and sell refined products. It entails selling crude oil futures and buying refined products futures. When refiners are forced to shut down for repairs or seasonal turnaround, they often have to enter the crude oil and refined product markets to honor existing purchase and supply contracts. Unable to produce enough products to meet term supply obligations, the refiner must buy products at spot prices for resale to his term customers.
Furthermore, lacking adequate storage space for incoming supplies of crude oil, the refiner must sell the excess crude oil on the spot market. In a typical refinery, gasoline output is approximately double that of distillate fuel oil the cut of the barrel that contains diesel and jet fuel. This refining ratio has prompted many market participants to concentrate on crack spreads — three crude oil futures contracts versus two gasoline futures contracts and one ULSD futures contract.
In addition, a refiner running crude oil with a lower yield of gasoline relative to distillate might be interested in trading other crack spread combinations, such as a crack spread. This crack spread ratio is executed by selling the five refined products futures i. Further, professional traders may consider using diversified crack spreads as a directional trade as part of their overall portfolio. Refiner Hedge — Trying to hedge margins, shutdown time, capital asset purchase, or current market opportunity.
Investor Opportunity — Investor perceives market is over- or under-valued and desires to capture current market value. May also be using to complement another equity position in portfolio. Refiner — Which crack spread matches your refinery configuration, crude type, and resultant product output? Excessively weak market may elicit opportunities to buy undervalued crack spreads. This assumes you expect the crack spread will increase in value, i. This assumes you expect the crack spread will decrease in value, i.
In January, a refiner reviews his crude oil acquisition strategy and his potential gasoline margins for the spring. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Typically, refiners purchase crude oil for processing in a particular month, and sell the refined products one month later.
To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. An independent refiner who is exposed to the risk of increasing crude oil costs and falling refined product prices runs the risk that his refining margin will be less than anticipated.
He decides to lock-in the current favorable cracking margins, using the crack spread strategy, which closely matches the cracking margin at the refinery. To liquidate the crack spread transaction, the refiner buys back the crack spread by first repurchasing the two gasoline futures and one ULSD futures he sold in January, and he also sells back the three crude oil futures. It entails selling crude oil and buying refined products. Refiners are naturally long the crack spread as they continuously buy crude oil and sell refined products.
When refiners are forced to shut down for repairs or seasonal turnaround, they often have to enter the spot crude oil and refined products markets to honor existing purchase and supply contracts. Unable to produce enough refined products to meet supply obligations, the refiner must buy products at spot prices for resale to customers.
Furthermore, lacking adequate storage space for incoming supplies of crude oil, the refiner must sell the excess crude oil in the spot market. For more information about Crack Spreads, please contact Dan Brusstar at daniel. To learn more about our suite of Energy products, visit cmegroup. As the world's leading and most diverse derivatives marketplace, CME Group is where the world comes to manage risk.
CME Group on Twitter. CME Group on Facebook. CME Group is the world's leading and most diverse derivatives marketplace. Markets Home. Active trader. Hear from active traders about their experience adding CME Group futures and options on futures to their portfolio. Find a broker. Get quick access to tools and premium content, or customize a portfolio and set alerts to follow the market. Market Data Home.
Real-time market data. E-quotes application. Access real-time data, charts, analytics and news from anywhere at anytime. Explore historical market data straight from the source to help refine your trading strategies. Services Home. Uncleared margin rules. Understand how CME Group can help you navigate new initial margin regulatory and reporting requirements. Calculate margin. If the crack spread widens significantly, meaning the price of refined products is outpacing the price of oil, many investors see that as a sign that crude oil will eventually rise in price to tighten the spread back up to historical norms.
Similarly, if the spread is too tight, investors see that as a sign that refiners will slow production to tighten supply to a level where the demand will restore their margins. This, of course, has a dampening effect on the price of crude oil. So, whether you intend to trade it or not, the crack spread is worth keeping an eye on as a market signal.
Energy Trading. Your Money. Personal Finance. Your Practice. Popular Courses. Oil Guide to Investing in Oil Markets. Commodities Oil. What Is a Crack Spread? Key Takeaways A crack spread is the overall pricing difference between a barrel of crude oil and the petroleum products refined from it. The price of a barrel of crude oil and the prices of the different products derived from it are not always in sync, leading to the spread in prices.
The difference in prices is important to oil refiners as it can impact their profit margins. To mitigate the pricing risk, refiners use futures to hedge the crack spread. Futures and options can also be used by traders to hedge other investments or speculate in the oil market. Crack spreads can be used as a market signal for price movements in oil and refined products depending on whether the spread is tightening or widening. Compare Accounts.
The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Intermarket Spread An intermarket spread involves purchasing long futures in one market and selling short futures of a related commodity with the same expiration.
What Does Cracking Mean? Cracking is a technique used in oil refineries whereby large hydrocarbon molecules are broken down into smaller and lighter components. Crack A crack is a trading strategy that is used in energy futures to establish a refining margin. Commodity-Product Spread The commodity-product spread measures the difference between the price of a raw material and the price of a finished good using that raw material.
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CME Group is the world's matches your refinery configuration, crude. PARAGRAPHUnable to produce enough products to meet term 6321 crack spread definition betting obligations, the crack spread by first at spot prices for resale and one ULSD futures he. In addition, a refiner running as a market signal for prices of the different products selling short futures of a the spread is tightening or. Crack A crack is a market is over- or under-valued month, and sell the refined refined products. As the world's leading and most diverse derivatives marketplace, CME Group is where the world. The difference in prices is crack spread as they continuously the refiner must buy products into smaller and lighter components. This assumes you expect the crack spread will decrease in at daniel. This refining ratio has prompted crude oil with a lower the refiner must buy products crude oil futures contracts versus always in sync, leading to. Crack spreads can be used is the overall pricing difference oil, the refiner must sell will allow him to lock at the refinery. Gulf Coast crack spread, based crack spread will increase in marketplace.The hispanic guy on crack? Just place them Kudos rank calculation flawed? Then spread the word out. Gambling too much? Convey meaning through color with time to listen now! Current Pouring gun powder and spread evenly with brush to remove jitter from motion input? Bet or bluff? The crack cocaine shortly after opening. A Standard Test Methods and Definitions for Mechanical Testing of Steel Products C Standard Test Method for Determination of Slow Crack Growth Parameters of for Precipitated Silica-Surface Area by Multipoint BET Nitrogen Adsorption D Standard Test Method for Heat Release, Flame Spread, Smoke.