What Is a Crack Spread? How to Trade the Energy Spread

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A crack spread is the price difference between a barrel of crude oil and the refined products made from it, mainly gasoline and distillates such as diesel, heating oil and jet fuel. It is a gross processing margin. It estimates how much value refining adds to a barrel before operating costs, so traders and refiners use it as a benchmark for refining profitability. The name comes from “cracking,” the industry term for breaking crude into lighter and heavier products.

How a Crack Spread Works

Crude and refined products trade in different units, so the first step is conversion. On the main US exchange, WTI crude futures are quoted in dollars per barrel, while RBOB gasoline and ultra-low sulfur diesel (ULSD, which replaced the old heating oil contract) are quoted in dollars per gallon. One barrel holds 42 gallons, so:

Product price per barrel = product price per gallon × 42

1:1 crack spread = product price per barrel − crude price per barrel

The standard contracts are sized to match: one crude contract covers 1,000 barrels, and one RBOB or ULSD contract covers 42,000 gallons, which is also 1,000 barrels. This lets a spread trader pair contracts one for one.

Common ratios

A refinery produces a mix of products, not one, so ratio spreads try to mirror that output:

• 1:1 crack: one crude contract against one product contract. Examples are the gasoline crack and the diesel crack.
• 3:2:1 crack: three barrels of crude against two of gasoline and one of distillate. This is the most widely quoted refining benchmark in the US.
• 5:3:2 crack: five crude against three gasoline and two distillate, for refineries with a heavier distillate output.

A jet fuel (ATF, aviation turbine fuel) crack works the same way, using a jet fuel price against crude.

Example of a Crack Spread

Hypothetical prices, for illustration only: WTI at $70.00 per barrel, RBOB at $2.30 per gallon, ULSD at $2.50 per gallon.

1. Convert products to barrels: gasoline = 2.30 × 42 = $96.60; diesel = 2.50 × 42 = $105.00.
2. Gasoline 1:1 crack = 96.60 − 70.00 = $26.60 per barrel.
3. Diesel 1:1 crack = 105.00 − 70.00 = $35.00 per barrel.
4. 3:2:1 crack = (2 × 96.60 + 1 × 105.00 − 3 × 70.00) ÷ 3 = (193.20 + 105.00 − 210.00) ÷ 3 = $29.40 per barrel of crude.

Dividing by three expresses the 3:2:1 result per barrel of crude processed, which makes it comparable with the 1:1 figures. All three prices assume the same delivery month. Mixing months would blend a calendar spread into the result.

Why the Crack Spread Matters to Refiners

A refiner is naturally “long” the crack spread. It buys crude and sells products, so it profits when product prices rise relative to crude and suffers when they fall. The two sides do not move together. Driving season lifts gasoline demand, winter lifts heating oil, refinery outages tighten product supply, and crude responds to its own set of global supply factors.

To protect a margin, a refiner can sell the crack spread with futures for the months it expects to process and ship. If the 3:2:1 spread is $29.40 when the hedge is placed, the refiner has roughly fixed that benchmark margin. If cash margins later shrink, futures gains offset the loss, and if they widen, the futures give up what the physical business gains. A product buyer, such as an airline exposed to jet fuel, faces the opposite risk and might hedge the other way.

How to Trade Crack Spreads

A crack spread is traded as a combination of derivatives legs, usually futures, not as a single price:

• Buying the crack: buy product futures and sell crude futures. This profits if the spread widens, for example because product demand strengthens or crude falls faster than products.
• Selling the crack: buy crude futures and sell product futures. This profits if the spread narrows, for example because product demand weakens or crude rallies. Selling the crack is sometimes called a reverse crack spread.

The result depends only on the change in the spread, not on the direction of oil prices. If crude and gasoline both rise by the equivalent of $5 per barrel, a 1:1 gasoline crack position is roughly unchanged. Exchanges also list crack spread options and calendar versions. Because the legs offset each other, a spread position may carry lower margin requirements than the same legs held outright. The exchange and broker set those requirements. Traders without futures access can hold refiner shares, though shares also carry company-specific risk unrelated to the crack.

Interpreting a Crack Spread

A wide crack spread means products are expensive relative to crude. Refiners then have an incentive to run harder, and their extra crude buying can support crude prices while more product supply eventually pulls the spread back. A narrow or negative spread means refining earns little. Refiners may cut runs, which reduces crude demand and can weigh on crude prices.

A sharp jump in the diesel or jet crack often points to tight supply of that particular product, such as low inventories or refinery outages, rather than to a change in crude itself. Analysts compare cracks across products and regions to see where the tightness sits.

Limitations of a Crack Spread

• It is not net profit. The spread ignores energy, labor, chemicals, maintenance and financing costs.
• Yields vary. A refinery’s actual output rarely matches 3:2:1 or 5:3:2 exactly, and it also produces lower-value products not in the formula.
• Crude choice matters. A benchmark built on WTI misstates margins for a refinery that runs Brent-linked, heavy or sour crude.
• Basis risk. Exchange contracts price at specific delivery points and specifications, while a refinery sells locally, so a hedge can leave gaps.
• Execution. Each leg has its own liquidity, and open interest differs across contract months.

Crack Spread vs. Related Terms

• Crack spread vs. refining margin: the crack spread is a market benchmark. A refining margin is a company’s realized result after its own yields, crude costs and expenses.
• Crack spread vs. crush and spark spreads: these are the same processing-margin idea in other markets. The crush spread compares soybeans with soybean meal and oil, and the spark spread compares power prices with natural gas.
• Crack spread vs. calendar spread: a crack spread pairs different commodities in the same period. A calendar spread pairs the same commodity in different delivery months.

The Bottom Line

Refiners, fuel buyers such as airlines, and spread traders all have a stake in the crack spread. Refiners can sell it with futures to lock in a benchmark margin, while traders profit from changes in the spread itself regardless of oil's direction. Anyone using it should remember that yields, crude choice and local pricing make a real refinery's margin differ from the exchange benchmark.