Refinery Crack Spread

A refinery crack spread measures the difference between the market value of refined petroleum products and the cost of the crude oil used to produce them. It is a simplified indicator of a refinery's gross processing margin, not its final profit, because it excludes many operating and logistical costs.

How it is calculated

The spread compares product prices with crude prices using an assumed refinery yield. Prices must be expressed in comparable units, usually per barrel.

• A 3:2:1 crack spread represents the value of two barrels of gasoline and one barrel of distillate, minus the cost of three barrels of crude oil.
• A 2:1:1 crack spread represents one barrel each of gasoline and distillate produced from two barrels of crude oil.
• The resulting amount may be divided by the barrels of crude used to express the spread on a per-barrel basis.

What the spread indicates

A wider spread generally signals that refined-product prices are high relative to crude oil prices, implying stronger notional refining margins. A narrow or negative spread indicates pressure on refining economics.

• The spread reflects conditions in both crude oil markets and refined-product markets.
• It can rise when product demand strengthens or refinery capacity becomes constrained, even without a comparable rise in crude prices.
• Refiners and traders may use crude and product futures in matching ratios to hedge changes in refining margins.

Limits of the measure

A crack spread is a benchmark rather than an exact measure of refinery profitability. Actual margins vary with the refinery's configuration, crude quality, product yield and regional prices.

• It does not fully account for energy, transport, labour, maintenance, compliance and other operating costs.
• A standard ratio cannot reproduce the product mix and technical complexity of every refinery.