Home > Charts > Chart Studies > Available Studies > Crack Spread

Crack Spread

The CRACK spread study is a futures transaction that parallels the process of refining Light Crude Oil (CL) into petroleum products, such as Heating Oil (HO) and Unleaded Gas (HU). Since the refining process involves "cracking" crude oil into its major components, the spread is referred to as a crack. Two of the major oil products produced in refineries are heating oil and unleaded gasoline. Therefore, the CRACK spread only involves crude oil (CL), unleaded gasoline (HU), and heating oil (HO).

The basic calculation is a simple one that is made somewhat more complicated because the quantities for each commodity are given in different units. These units for crude oil (CL), unleaded gasoline (HU), and heating oil (HO) must be converted to the divisor unit. For example, CL is quoted in dollars per barrel, but HO and HU are both quoted in dollars per gallon. Therefore, HO and HU must be converted to gallons. This is done by multiplying their prices by 42 (1 barrel = 42 gallons).

The price of each leg of the spread is then multiplied by the number of contracts for each leg (the default number of contracts for Crack Spreads is a 1-2-3 ratio). The cost of the crude oil is subtracted from the cost of the products, and the result is divided by the number of contracts of crude oil. This results in the following expression:

- %CL * 3 + %HU * 2 * 42 + %HO * 1 * 42

The defaults for the other contracts used in the study are based on the charted symbol.  The study uses the same month/year for the 2nd and 3rd legs as is used for the charted symbol. If the charted instrument is a continuation symbol, the study uses continuation symbols for the 2nd and 3rd legs, by default. See examples in the table below.

*Note: "1!" = front month.  Since entering "CL1!" as the charted symbol results in the 2nd and 3rd legs being "HU1!" and "HO1!", this could display a Crack Spread of CLU1, HUQ1, and HOQ1. If the month/year of the charted symbol is not available for a leg, the next available contract is used.  For example, if the charted symbol is RCLQ1 and RHQ1 does not exist, RHU1 is used instead.

The study parameters reflect the symbol displayed at the time the study is plotted.  Each time the charted symbol is changed the study must be deleted and re-plotted to reflect the new symbol or the symbols must be changed in the study parameters dialog box.  Any study that is left plotted on a chart (not deleted) at the time the main charted symbol is changed maintains the old study parameters linked to the original charted symbol.

If the charted symbol is a CL, RCL, SC, or RSC symbol, the default numbers of contracts for the Crack study are 3, 2, and 1.  If the charted symbol is LBC, the default numbers of contracts for the Crack study are 1, 0, and 1.  The number of contracts can be changed via the study Properties dialog box.

Multipliers are as follows:

Intraday charts are legal only if the session times of the various legs match.

Interpretation

The CRACK study is similar to the CRUSH spread used for soybean. The combined value of heating oil and unleaded gasoline must exceed the crude oil price by more than the refining production costs. The most common ratio for the CRACK spread is 1-2-3. Three barrels of crude produce two barrels of unleaded gasoline, and one barrel of heating oil. However, you are allowed to use other ratios when calculating the spread.

The CRACK spread results can be affected by the seasons. For instance, during the summer months, unleaded gasoline (HU) is in greater demand than heating oil (HO). During the winter months, the demand shifts to heating oil.

If a spread was too narrow to produce a refining profit, you could assume product prices would have to rise to catch up to crude oil prices. Therefore, you would favor heating oil and gasoline contracts over crude oil.

On the other hand, if there is a large spread between product and crude prices, you could assume refiners would push production and selling of unleaded gasoline and heating oil to take advantage of the profit. This increase in selling would tend to push product prices lower. Therefore, you would favor the crude oil over heating oil and gasoline.