For example, when you search for a film, we use your search information and location to show the most relevant cinemas near you. Item B: The next step in refinery profitability is to know or calculate the product yield in volume % from the crude oil run in the specific refinery configuration. Supply and demand fundamentals that dictate market price behavior also, in turn, impact refinery crack spreads comparatively. As more processes are added to a refinery e. Trading securities can involve high risk and the loss of any funds invested. The margins are calculated on a per-barrel basis.
If the spread is negative, meaning the refinery does not have a positive profit margin, refineries are typically not going to be buyers of crude oil and this should be reflected by an overall decrease in demand for physical crude from the refiner. Other professional traders may consider using crack spreads as a directional trade as part of their energy portfolio, with the added benefit of its low margins the crack spread trade receives a substantial spread credit for margining purposes. There are numerous ways to calculated refinery margin throughout the industry. In turn, the refiner may reduce its output, causing the spread to widen again. © copyright 2013 — 2018 tastytrade, Inc.
Refinery Profitability Refineries with different types of processing units can produce very similar products but with different costs. Crack spreads measure the price differential estimated gross margin between the crude oil commodity that is inputted into the refinery and the selling price of the refined product. Under these circumstances, the developing world is slowly becoming the center of gravity for the refining industry. Because refiners are on both sides of the market at once, their exposure to market risk can be greater than that incurred by companies who simply sell crude oil, or sell products to the wholesale and retail markets. Similarly, a 6:3:2:1 crack spread denotes the spread between the cost of buying 6 barrels of crude oil and the revenues from selling 3 barrels of gasoline, 2 barrels of diesel fuel, and 1 barrel of fuel oil or kerosene. Any reduction in customs duty on petro-products reduces the effective protection to refining companies.
Landed Crude Cost Now looking at crude… Crude Oil Landed Cost Calculation Crude oil prices are usually quoted at the loading port at the point of origin or at a meter transfer point in a pipeline for domestic sourced material. Simple refineries employ limited processing technology and produce a product slate similar to the component make-up of the crudes they run. There are several different types of crack spreads, which you can find listed below. He sees that gasoline prices are strong, and plans a two-month crude-to-gasoline spread strategy that will allow him to lock in his margins. Other market participants dealing provide even more customized products. Classifications of refineries allude to the quality of refined products they produce and are later influential in assignment of a refinery complexity score, based on the Nelson Complexity Index, on a scale of 1-15 least to most complex. This is expected to slightly offset the impact of global overcapacity on its operating margins.
A 3-year chart of the relationship between crude oil yellow and gasoline prices purple is illustrated in the crack spread chart below. If the refined product value is higher than the price of the crude oil, the cracking margin is positive. One way in which a refiner could ensure a given spread would be to buy crude oil futures and sell product futures. These are known as 3:2:1 crack spreads and even 5:3:2 crack spreads, and they can also be used as a form of hedging for an investment in refiners themselves. 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. Since 2011, increased crude oil production, primarily from the unconventional plays in the U. In Asia-Pacific, China has led the growth in refining capacity.
These costs generally do not vary directly with production levels and therefore are primary fixed costs. To determine the profitability of refining an individual product, however, a crack spread is calculated. Except perhaps in the very near term, crude and product prices have proven unpredictable, despite the best efforts of forecasters and market analysts over decades. My Blog is not affiliated with, neither does it represent the views, position or attitudes of my employer s their clients, or any of their affiliated companies. He decides to lock-in the current favorable cracking margins, using the 3:2:1 crack spread strategy, which closely matches the cracking margin at the refinery. I have been in the commodities sector for over 10 years having international experience of both the physical and financial sectors Feel free to drop me a line using the buttons below, send an or through the page on this blog Subscribe to stay up-to-date If you liked this post and would like to stay informed of the latest content as soon as it's published, please enter your email address below to subscribe to this blog You'll receive notifications of new posts by email and I don't sell, share or spam your address.
Crack Spread History Latest crack spread research Writing recently in , Liu, Vendenov and Power, reported on the effectiveness of crack spread hedging strategies during a period of high volatility and changing patterns in the prices crude oil and petroleum. It also lowers the profit margins of refining companies which sell petro-products at import parity price to oil marketing companies. May also be using to complement another equity position in portfolio. Crude Oil Landed Cost Crude oil prices are usually quoted at the loading port at the point of origin or at a meter transfer point in a pipeline for domestic sourced material. A crack, or crack spread, is a term used in the energy markets to represent the differences between crude oil and wholesale petroleum product prices. The Crack Spread is the spread between the price of crude oil and the petroleum products that are refined from the crude oil. More on Netback Product Value Refiner margins are very difficult to determine on a product-by-product basis.
This gives us a per barrel price that we can then use to compare to the per barrel price of crude oil. I have been in the commodities sector for over 10 years having international experience of both the physical and financial sectors Feel free to drop me a line using the buttons below, send an or through the page on this blog. As of 2006, almost all of the petroleum-based diesel fuel available in the U. So there are other crack spread plays where you buy three oil futures and then match the distillates mix more closely as two barrels worth of gasoline contracts and one worth of heating oil for example. To complete the crack spread transaction, the refiner buys back the crack spread by first repurchasing the gasoline futures he sold in January, and he also sells back the crude oil futures. Within a region, there can also be seasonal differences in demand for heating fuel versus transportation fuel.