And how do you calculate it?
I could just look like a genius here and give you the details on the refinery crack spread and how to calculate it. But that wouldn’t be fair.
I found out this information in the current edition of the Casey Energy Report.
The “crack spread” represents how much money refineries are making. It does that by measuring the price differential – the price spreads in the petroleum cracking process – between gasoline, distillates, and crude oil.
We use crack spreads as a sort of window, one way to track what’s happening with oil in the middle of its two direct impacts on the markets and the economy in general: when it comes out of the ground, and when end users put it to work.
The most commonly used crack spread is the NYMEX 3-2-1 crack spread, which calculates a refinery’s profit margin on three barrels of oil. One reason it’s popular is that it takes into account that refineries tend to produce about twice as much gasoline as heating oil.
Here’s how the NYMEX 3-2-1 crack spread gets its name:
- Take the price of the NYMEX No.2 Heating Oil Future (in cents per gallon) and convert it to dollars per barrel. There are 42 gallons in a barrel.
- Take the price of the NYMEX Reformulated RBOB Gasoline Futures (in cents per gallon) and convert it to dollars per barrel. Multiply this number by 2 and add it to the result from 1.
- Subtract 3 times the spot price of crude oil.
Now to put numbers with it:
- NYMEX Heating Oil: $1.7881/gallon à $75.10/barrel
- RBOB Gasoline Price: $1.9463/gallon à $81.74/barrel
- Crude Oil: $71.50/barrel
The 3-2-1 crack spread is then 75.10+2*81.74-3*71.50 = $24.08.
The crack spread is simply a measuring tool. A spread of $24.08 on 3 barrels of oil doesn’t mean the refinery makes a profit of $8.03 per barrel. What it means is that $24.08 divided by $71.50 divided by 3 barrels indicates a profit margin of 11.22%.
As a general rule, refineries look to make 10% or more.
Now, in order to know what to do with that information, I highly suggest you subscribe (they have risk free trials) to the Casey Energy Report today.
