Crack Attack

Cracks are the spread between the price of a finished product (gasoline, diesel and so on) over* crude oil. A crack is usually quoted in US dollars per barrel. The crack could be thought of as oil refinery's US$ per barrel profit margin before the costs of running the refinery.

Over the past few months we have had very low gasoline inventories (as gasoline demand has recovered from the 2008 oil shock causing inventories to fall) but very high diesel and jet fuel inventory (as commercial activity has not recovered to the same extent as gasoline demand).

In 2009, Gasoline cracks (see chart 1) have been increasing while distillate margins (see chart 2) have been decreasing. The net result is that, in 2009, gasoline prices at the pump have increased more quickly compared with crude oil prices. Diesel and jet fuel prices have increased more slowly than crude oil prices in 2009.

Refineries produce a basket of finished products including gasoline, diesel, heating oil, jet fuel and residual fuel. Net refinery profitability (a proxy is called the 321 spread) has moved sideways as higher gasoline margins are offset by lower diesel and jet fuel margins (see chart 3).

Chart 1: Gasoline Crack
Chart 2: Heating Oil Crack (proxy for diesel and jet fuel)

Chart 3: 321 Crack (proxy for total refinery basket margin)

*Cracks tend to be positive except for residual fuel oil cracks which tend to be negative. See Oil 101 for more.