What is a crack spread?
The crack spread is the difference between the revenue from selling refined products (e.g. gasoline, distillate/heating oil) and the cost of the crude oil used to make them.
It is a refinery margin indicator: it shows the gross margin (before operating costs) a refiner makes from turning crude into products. The name comes from “cracking” — the refining process that breaks heavy hydrocarbons into lighter products.
How it’s calculated
Units: Crude is quoted in $/barrel; gasoline and distillate in $/gallon. One barrel = 42 US gallons.
3:2:1 crack spread (standard US benchmark): for every 3 barrels of crude, the refinery is assumed to yield 2 barrels of gasoline and 1 barrel of distillate (heating oil/diesel).
Crude cost (3 bbl) = 3 × crude $/bbl
Crack spread ($/bbl) = [Product revenue − Crude cost] ÷ 3
Simple 1:1 cracks: Gasoline crack = (42 × gasoline $/gal) − crude $/bbl. Distillate crack = (42 × distillate $/gal) − crude $/bbl (each in $/bbl).
Yield assumptions and alternatives
Real yields vary by crude quality (light vs heavy) and refinery configuration (simple vs complex). The 3:2:1 ratio is a US benchmark; other regions use different ratios. When actual yields differ, traders adjust hedges (e.g. more gasoline futures if the refinery is gasoline-heavy).
| Crude / refinery type | Typical gasoline | Typical distillate | Other (resid, etc.) |
|---|---|---|---|
| Light crude, simple refinery | ~45–50% | ~25–30% | ~20–30% |
| Light crude, complex refinery | ~50–55% | ~30–35% | ~10–20% |
| Heavy crude, simple refinery | ~35–40% | ~25–30% | ~30–40% |
| Heavy crude, complex refinery | ~45–50% | ~35–40% | ~10–20% |
Alternative crack spreads: In Europe, a 5:3:2 spread (5 bbl crude → 3 bbl gasoline, 2 bbl gasoil) is common, reflecting higher diesel demand. Some US contracts use 2:1:1 (2 gasoline : 1 distillate per bbl crude). Choose the ratio that best matches your refinery slate or hedging book.
Why it matters
Refiners use it to gauge profitability and to hedge (e.g. sell product futures, buy crude futures).
Traders trade crack spreads as a single product (e.g. CME 3:2:1 crack spread).
Analysts use it to compare refining margins across regions and over time.
Hedging the crack spread
To hedge a refinery margin, you lock in the spread between crude and products using futures (or OTC).
- Protect gross margin (refiner): Go long crude (buy crude futures) and short refined products (sell gasoline and distillate futures in the ratio that matches your yield). That way, if product prices fall or crude rises, the futures position offsets the physical P&L.
- Reverse (speculative or arbitrage): Go short crude, long products when you expect the crack to widen.
Crack spread swap: Instead of separate crude and product legs, you can trade a crack spread swap (OTC): one leg is the crude price, the other is a formula based on product prices (e.g. 3:2:1 basket).
You agree a fixed crack spread; at settlement, the counterparty pays or receives the difference between the fixed and the floating crack. This simplifies hedging and reduces the number of contracts to manage.