Breaking Down Energy Crack Spreads as Real-Time Indicators

In the energy sector, a crack spread is the terminology that describes the differential between the price of crude oil and petroleum products. Gasoline is the most ubiquitous oil product. Gasoline tends to peak during the driving season in spring and summer and decline when the weather gets cold during fall and summer as drivers put less mileage on odometers. Heating oil, jet, and diesel fuels are distillates with less seasonal supply-demand factors.

WTI crude oil futures trade on the CME’s NYMEX division. WTI is a light, sweet crude oil with low sulfur content and is the preferable ingredient in gasoline production. Brent crude oil futures on the Intercontinental Exchange have a slightly higher sulfur content and are best suited for processing into distillate fuels.

Gasoline and heating oil futures trade on NYMEX, and crack spreads measure the oil products against the WTI NYMEX crude oil futures. The heating oil futures are a proxy for the other distillate products. Consumers require oil products as raw crude oil has few applications in its natural state.

Crack spreads reflect refining margins

• Gasoline and distillate crack spreads are the margin refiners achieved from processing a crude oil barrel into oil products.
• Rising crack spreads indicate increased demand for gasoline and distillates.
• Falling crack spreads reflect a weakening demand for oil products.

Cracks signal the real-time oil fundamentals

• Crude oil is the primary ingredient in product refining.
• Rising crack spreads translate to increasing oil demand.
• Falling crack spreads indicate a decline in petroleum requirements.
• Crack spreads are volatile and reflect the real-time supply and demand fundamentals for the underlying commodity, raw crude oil.

Cracks are a real-time indicator of refinery earnings

• Refineries invest significant capital in the equipment and infrastructure that processes crude oil into oil products.
• Rising crack spreads indicate higher refinery earnings.
• Declining crack spreads translate to lower refinery earnings and potential losses.

Crack spreads reached record highs in 2022

• WTI and Brent crude oil prices fell short of the 2008 highs in 2022.
• Gasoline and gasoline crack spreads reached an all-time high in June 2022, with gasoline futures rising to $4.3260 per gallon wholesale and the gasoline crack peaking at $61.95 per barrel.
• Heating oil and distillate crack spreads reached a record peak in April 2022, with heating oil futures rising to $5.8595 per gallon wholesale and distillate cracks reaching $88.56 per barrel in October 2022.

Current gasoline and distillate crack levels- Distillates will likely be more volatile

• In mid-September 2023, the gasoline crack spread was $25.50 per barrel.
• In mid-September 2023, the heating oil spread was $56.60 per barrel.
• Crack spreads remain volatile in late 2023. Distillate crack spreads were higher in 2023 as the driving season is ending, causing gasoline demand to decline.
• The main ingredient in gasoline is WTI crude oil, a sweet crude oil with a lower sulfur content and reflects North American petroleum.
• The primary ingredient in distillate fuels is Brent crude, a sweet petroleum with a higher sulfur content. Brent is the benchmark for European, Russian, African, and Middle Eastern crude oil. Since OPEC+ controls Brent pricing and the war in Ukraine continues to rage, distillate crack spreads will likely experience more volatility.