Crack spread

[wrongsaidfred]

Hi David,

Quick question: is the crack spread measured in terms of $/barrell or $/gallon? I assume the crush spread is in terms of $/pound or something like that.

Thanks,
Mike

 

[David Harper CFA FRM]

Hi Mike,

I'm not expert on this. If I look it up:

McDonald says traders speak of "5-3-2" and "3-2-1", as in gallons.

Geman (FRM assigned for commodities) has: "Crack spread: Calculation of the worth of a barrel of crude oil in terms of the value of its refined products, such as gasoline and heating oil. Crack spreads may be based on a variety of refinery models and also depend on the type of crude input. They are usually expressed in dollars and cents per barrel of crude."

It just seems to me that gallons is a more reliable common denominator as, if we look at the futures contract specifications:

http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
crude oil is quoted per barrel

http://www.cmegroup.com/trading/energy/refined-products/heating-oil_contract_specifications.html
heating oil is price quoted per gallon

http://www.cmegroup.com/trading/energy/refined-products/rbob-gasoline_contract_specifications.html
gasoline is per gallon

... to me, it just seems more robust to convert oil at 42 gallons per barrel, than convert oil and gas to barrels

Thanks, David