Commodities

Crack Spread

The margin between crude oil and refined products (gasoline, diesel) — a proxy for refining profitability and a leading energy-equity signal.

Definition

The classic 3:2:1 crack spread = (2 × gasoline + 1 × distillate) − 3 × crude, all per barrel. It captures the refiner's margin after processing one barrel of crude into roughly two parts gasoline and one part distillate.

Crack spreads track product demand independently of crude prices, making them a cleaner read on driving-season demand, freight demand, and refining capacity utilization.

Why it matters

Refiner equities (XOM, VLO, MPC) trade much more closely with cracks than with WTI alone. Crack spreads also lead retail gasoline prices by ~4 weeks.

Worked example

Mid-2022: distillate crack spreads exceeded $60/bbl on diesel shortages — refiner margins printed record highs while crude was off its peak. VLO outperformed XOM materially.

Frequently asked

Why use 3:2:1?⌄

Approximates US refinery yield from a barrel of crude. European refiners often use different ratios (e.g., 5:3:2).

What widens cracks?⌄

Refinery outages, strong product demand, low refined-product inventories, and feedstock availability constraints.

How do you trade cracks?⌄

Futures spreads (long products / short crude), or long refiner equities / short integrated majors.

Are cracks seasonal?⌄

Yes — gasoline cracks peak in summer driving season, distillate cracks peak in winter heating season.

Related terms

Contango

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Backwardation

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Calendar Spread

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Freight Premium

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