Profit margins for crack

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While crack spread are quoted in dollars per barrel and many refined products are quotes in dollars per metric ton or dollars per gallons, if the refined product is not quoted in dollars per barrel it needs to be converted to dollars per barrel.

If the refined product value is higher than the price of the crude oil, the crack spread is profitable. On the other hand, if the refined product value is less than the value of crude oil, then the crack spread is not profitable. Just as oil producers and consumers have the ability to hedge their exposure to volatile petroleum prices, refiners have the ability to hedge their exposure as well. 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. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Cracking is a technique used in oil refineries whereby large hydrocarbon molecules are broken down into smaller and lighter components.

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 Is a Crack in the Energy Markets? A crack is a trading strategy that is used in energy futures to establish a refining margin. What Is a Spread Option? A spread option is a derivative based on the value of the difference, or spread, between the prices of two or more assets.

Oil Refinery Definition An oil refinery is an industrial plant that refines crude oil into petroleum products such as diesel, gasoline and heating oils. 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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