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The word "spread" is generally used in the financial industry to refer to the difference between two related entities that can be expressed quantitatively while the word "crack" is used in the oil refining industry as a verb describing the process of separating and transforming the various chemical components of crude oil into saleable refined products. Thus the term "crack spread" refers to the spread, or margin, that a refinery can earn by cracking a barrel of oil into refined products. Image File history File links Broom_icon. ...
In finance, a spread trade refers to the act of buying one security or futures contract and selling another related one, in an attempt to profit from the change in the price difference between the two. ...
In petroleum geology and chemistry, cracking is the process whereby complex organic molecules (e. ...
View of Shell Oil Refinery in Martinez, California. ...
Pumpjack pumping an oil well near Lubbock, Texas Ignacy Åukasiewicz - inventor of the refining of kerosene from crude oil. ...
A refinery is composed of a group of chemical engineering unit processes and unit operations used for refining certain materials or converting raw material into products of value. ...
One of the most important factors affecting this spread is the relative proportions of the products produced by a refinery. There is a wide range of such products which can include gasoline, kerosene, diesel, heating oil, aviation fuel, asphalt and various others. To some degree, the mix of these products can be varied in order to suit the demands of the local market. Regional differences in the demand for each refined product depend upon the relative demand for fuel for heating, cooking or transportation purposes. Within a region, there can also be seasonal differences in demand for heating fuel versus transportation fuel. Gasoline or petrol is a petroleum-derived liquid mixture consisting mostly of hydrocarbons and enhanced with benzene or iso-octane to increase octane ratings, used as fuel in internal combustion engines. ...
Kerosene or paraffin oil (British English, not to be confused with the waxy solid also called paraffin wax or just paraffin) is a colorless flammable hydrocarbon liquid. ...
Rudolf Christian Karl Diesel (1858-1913), inventor of the diesel engine. ...
Heating oil, or burning oil, also known in the United States as No. ...
An aviation fuel truck. ...
Base layer of asphalt concrete in a road under construction. ...
The mix of refined products is also affected by the blend of crude oil feedstock processed by a refinery and by the capabilities of the refinery. Heavier crude oils contain a higher proportion of heavy hydrocarbons composed of longer carbon chains. As a result, heavy oil is more difficult to refine into lighter products such as gasoline. A refinery using less sophisticated processes will be constrained in its ability to optimize its mix of refined products when processing heavy oil. A feedstock is a petrochemical used as a raw material to be fed into a machine or processing plant. ...
Heavy oil may refer to: Fuel oil that contains residual oil left over from distillation. ...
One of the primary goals in managing a refinery is optimizing the mix of refined products given the supply and demand constraints of the local market. These constraints are expressed by relative differences in the local prices of both refined products and available feedstocks. By adjusting its product mix to take advantage of local price differentials, a refinery can optimize its crack spread. The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...
For integrated oil companies that control their entire supply chain from oil production to retail distribution of refined products, there is a natural economic hedge against adverse price movements. For independent oil refiners which purchase crude oil and sell refined products in the wholesale market, adverse price movements can present a significant economic risk. Given a target optimal product mix, an independent oil refiner can attempt to hedge itself against adverse price movements by buying oil futures and selling futures for its primary refined products according to the proportions of its optimal mix. This is a list of petroleum companies. ...
A supply chain, logistics network, or supply network is a coordinated system of organizations, people, activities, information and resources involved in moving a product or service in physical or virtual manner from supplier to customer. ...
In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ...
For simplicity, most refiners wishing to hedge their price exposures have used a crack ratio usually expressed as X:Y:Z where X represents a number of barrels of crude oil, Y represents a number of barrels of gasoline and Z represents a number of barrels of distillate fuel oil, subject to the constraint that X=Y+Z. This crack ratio is used for hedging purposes by buying X barrels of crude oil and selling Y barrels of gasoline and Z barrels of distillate in the futures market. The crack spread X:Y:Z reflects the spread obtaining by trading oil, gasoline and distillate according to this ratio. Widely used crack spreads have included 3:2:1, 5:3:2 and 2:1:1[1]. As the 3:2:1 crack spread is the most popular of these, widely quoted crack spread benchmarks are the "Gulf Coast 3:2:1" and the "Chicago 3:2:1". Fuel oil is a fraction obtained from petroleum distillation, either as a distillate or a residue. ...
A futures exchange, is a corporation or organization which provides a marketplace in which to trade derivatives such as futures contracts and options. ...
Various financial intermediaries in the commodities markets have tailored their products to facilitate trading crack spreads. For example, NYMEX offers virtual crack spread futures contracts by treating a basket of underlying NYMEX futures contracts corresponding to a crack spread as a single transaction[2]. Treating crack spread futures baskets as a single transaction has the advantage of reducing the margin requirements for a crack spread futures position. Other market participants dealing over the counter provide even more customized products. The term financial intermediary may refer to an institution, firm or individual who performs intermediation between two or more parties in a financial context. ...
Chicago Board of Trade Commodity market Commodity markets are markets where raw or primary products are exchanged. ...
The New York Mercantile Exchange**** NOTE the AMENX is FAKE, created by york-commodities to scam your money, if you send money you will never see it again**** You have been warned. ...
The following discussion of crack spread contracts comes from the Energy Information Administration publication Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity Industries[3]: The Energy Information Administration (EIA), as part of the U.S. Department of Energy, collects and disseminates data on energy reserves, production, consumption, distribution, prices, technology, and related international, economic, and financial matters. ...
Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products. Because refiners can reliably predict their costs other than crude oil, the spread is their major uncertainty. One way in which a refiner could ensure a given spread would be to buy crude oil futures and sell product futures. Another would be to buy crude oil call options and sell product put options. Both of those strategies are complex, however, and they require the hedger to tie up funds in margin accounts. A call option is a financial contract between two parties, the buyer and the seller of this type of option. ...
A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...
To ease this burden, NYMEX in 1994 launched the crack spread contract. NYMEX treats crack spread purchases or sales of multiple futures as a single trade for the purposes of establishing margin requirements. The crack spread contract helps refiners to [[Vendor lock-in|lock-in] a crude oil price and heating oil and unleaded gasoline prices simultaneously in order to establish a fixed refining margin. One type of crack spread contract bundles the purchase of three crude oil futures (30,000 barrels) with the sale a month later of two unleaded gasoline futures (20,000 barrels) and one heating oil future (10,000 barrels). The 3-2-1 ratio approximates the real-world ratio of refinery output—2 barrels of unleaded gasoline and 1 barrel of heating oil from 3 barrels of crude oil. Buyers and sellers concern themselves only with the margin requirements for the crack spread contract. They do not deal with individual margins for the underlying trades.
An average 3-2-1 ratio based on sweet crude is not appropriate for all refiners, however, and the OTC market provides contracts that better reflect the situation of individual refineries. Some refineries specialize in heavy crude oils, while others specialize in gasoline. One thing OTC traders can attempt is to aggregate individual refineries so that the trader’s portfolio is close to the exchange ratios. Traders can also devise swaps that are based on the differences between their clients’ situations and the exchange standards.
References
- ^ Petroleum Refining Overview
- ^ See NYMEX Crack Spread Handbook
- ^ See subsection Crack Spread Contracts of chapter 3. Managing Risk With Derivatives in the Petroleum and Natural Gas Industries
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