Energy trading :The Crack Spread – ‘The Crack’
The crack spread refers to the differential between the prices of crude oil and the prices of refined petroleum products, such as petrol and heating oil.
The spread is utilised to evaluate the profitability of refining crude oil into these products.
Crude Oil Crack
The crack spread can be calculated using the following equations:
Crack Spread = Refined Product Price – Crude Oil Price
where:
i/. Refined Product Price is the price of the refined petroleum product (e.g., petrol) per unit.
ii/. Crude Oil Price is the price of crude oil per unit.
Calculation NB: To calculate the crack spread per barrel, one needs to ensure that both the refined product price and the crude oil price are in the same unit (the standard unit is per barrel).
The unit price of crude oil as Po (in $/barrel).
Crack Spread (per barrel) = Pp – Po
The crack spread can also be expressed as a percentage, indicating the profit margin relative to the cost of crude oil.
To calculate the crack spread percentage, one can utilise the following equation:
Crack Spread Percentage = (Crack Spread / Crude Oil Price) * 100
The unit price of the refined product as Pp (in $/barrel)
This equation calculates the crack spread as a percentage of the crude oil price.
NB: It is imperative to note that the crack spread is influenced by various factors such as:
i/. supply and demand dynamics,
ii/. refining capacity,
iii/. market conditions,
i/. geopolitical events.
Therefore, the crack spread can fluctuate over time and across different regions.
The Simple Excel Method to Calculate the Crack Spread and Crack Spread Percentage
Assuming one has the refined product price (Pp) and the crude oil price (Po) in the same unit (per barrel), one can utilise the following formulae in Excel:
Crack Spread (per barrel) = Pp – Po
Crack Spread Percentage = (Crack Spread / Po) * 100
To employ these formulae in Excel, one can follow these steps:
1. Enter the refined product price (Pp) in one cell.
2. Enter the crude oil price (Po) in another cell.
3. In a third cell, enter the formula “=Pp – Po” to calculate the crack spread (per barrel).
4. In a fourth cell, enter the formula “=(Crack Spread / Po) * 100” to calculate the crack spread percentage.
NB: Ensure to replace “Pp” and “Po” in the formulae with the actual cell references where one has entered the prices. After entering the formulae correctly, Excel will automatically calculate the crack spread and crack spread percentage based on the provided prices.
NB: The crack spread is subject to fluctuations based on various factors, so one will need to update the prices periodically to obtain the most accurate calculations.*
