The refining margin between crude oil and its many products can partially be represented by the crack spread. Crude oil is refined or "cracked" into many different constituent products but two of the main components are gasoline and heating oil.

A barrel of crude oil yields different proportions of gasoline and heating oil depending on the crude and the refinery. Assume the percentage of gasoline is equal to the percentage of heating oil. The calculation for the crack spread follows:

        One crude oil contract                     = 1000 barrels

        One heating oil or gasoline contract = 42,000 gallons

        One thousand barrels                     = 42,000 gallons

 

Therefore, two crude oil contracts equal approximately one heating oil and one unleaded gasoline contract:

 

          2 crude oil = 1 heating oil + 1 unleaded gasoline

 

The above relationship is the basis for the crack spread. Subtracting the crude oil on both sides of the equation and dividing by 2 provides the margin or crack spread on a 1000 barrel basis:

Crack spread = [1 heating oil + 1 gasoline - 2 crude oil]/2

Assume:

July crude oil         = $21.00/barrel

July heating oil      = $0.56/gallon = 42 x $0.56 = $23.52/barrel

July unleaded gas  = $0.66/gallon = 42 x $0.66 = $27.72/barrel

The crack spread    = ($23.52 + $27.72 - 2 x $21.00)/2

                            = $4.62

The trader might compare this to historical values or determine fundamental or technical relationships for an appropriate valuation.

As mentioned, there are different proportions of gasoline and heating oil from a barrel of crude oil. Other crack spreads are the 3:2:1 which is three crude to two gasoline to one heating oil. Another is the 5:3:2 or five crude to three gasoline to two heating oil. Gasoline is generally produced in greater amounts than the heating oil component.