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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Knighty Tin who wrote (14054)10/26/2004 1:12:31 PM
From: mishedlo  Read Replies (2) of 116555
 
Crackspreads explained by BI on the FOOL
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Crackspreads are a fundamental part of the oil business, and someplace where I think TA CAN be a productive activity.

First thing I would say is that you need to wrap your head around one fact. No one wants or needs crude oil, they want the products it can be turned into.

Refineries "boil" crude oil within specialized equipment, the difference between the value of a barrel of crude oil and the products it produces is called the crack spread. The crackspread times volume less refinery operating costs will be a refineries gross profit.

Crack spread is used in two ways, first is a product crack spread the "fuel oil crack spread" is the diffrence between the price of a barrel of crude and a barrel of fuel oil. Any product spread is the value of the product less that of the crude.

Yesterday for example now with crude at $54.33/BBL and fuel oil at $1.56/gallon. The fuel oil crack spread was equal to:
(42*$1.56) - $54.33 = $11.19
With gasoline at $1.3935 the "gasoline crack spread" was equal to:
(42*$1.3935)- $54.33 = $4.19

Normal crackspreads or reference crackspreads are the ones traded on NYMEX. The 3-2-1 crackspread is based on a "normal" refinery, and what is commonly refered to as just the "crackspread". Twice the gasoline crackspread plus the fuel oil spread divided by 3 is the value of this crackspread. A refiner would buy 3 barrels of crude oil and sell two barrels of gasoline and one barrel of fuel oil to lock in the "crackspread"
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