Refined products like RBOB and ULSD are often traded as a spread to crude oil, called a crack spread. Trading a spread involves a long position in one futures contract and a short position in another. Crack spreads reflect the difference in price between the products produced from refining crude oil and the crude oil itself. The term crack refers to the refining process of using heat and pressure to break down crude oil into smaller, more useful molecules.

Crack spreads are used as a proxy for the profitability for the refining industry or the profitability of producing one refined product like gasoline over alternative refined products. If a crack spread is low, a refiner may cut back on supplying that product. If a crack spread is high, a refiner may produce more of it.

Why trade a crack spread?

Gasoline and diesel prices move up and down with crude oil, but a crack spread has its own characteristics. Trading gasoline or diesel as a crack spread removes much of the positive correlation with crude oil from a trader’s position. This allows a trader to isolate price movements specific to a refined product or a refined product’s relationship with crude oil. 

Crack spreads can also reduce the capital required to trade refined products. Thanks to margin offsets from trading a long and short position in correlated instruments, crack spreads may require up to 30% less capital than an outright ULSD or RBOB futures position.

Crack spread trades

There are several different ways to structure a crack trade and varied reasons to trade each type. Let’s look at the mechanics and a few crack spread trades using RBOB, ULSD and WTI futures products at CME Group.


Are you missing out on Refined Products trading opportunities?

This is the fourth article of a series designed to help you maximize trading opportunities in the Refined Products complex.


1) 1:1 Crack spread

The 1:1 crack spread refers to the spread between one Refined product futures contract and one WTI futures contract.

Both RBOB and ULSD futures contracts are priced in dollars per gallon, while WTI futures are in dollars per barrel. To calculate the ULSD crack, also often called heating oil, first convert the price of ULSD to barrels by multiplying the price by 42 (gallons in a barrel of oil). To get the crack spread, subtract the price of WTI from ULSD in dollars per barrel. Crack spreads are referred to in dollars per barrel and typically use Refined products and Crude Oil futures with the same tenor (expiry month).

A November ULSD crack spread:  HOX4 * 42 - CLX4  = $2.35 * 42 - $74.67 = $24.03 per barrel

The contract size for RB and HO futures on CME Group is 42,000 gallons, which is equivalent to 1,000 barrels. CL futures are also sized at 1,000 barrels. Therefore to buy a 1:1 crack spread, you would buy one Refined product futures contract and sell one WTI futures contract. 

Trading a 1:1 ULSD crack spread

A trader sees ULSD has pushed through its 200-day moving average and believes this will create more selling. He would like to sell the HOX4 futures contract but is concerned that escalating tensions in the Middle East may send crude higher and lift ULSD with it. He considers selling a heating oil crack using the micro-sized futures contracts.

Chart 1

Trade Notional Capital Required
Sell 1 MHOX4 at 2.3065 $9,687.30 $599
Buy 1 MCLV4 at 73.65 $7,365.00 $548
Short 1:1 Crack at $23.223   $480

The trader is short the 1:1 crack at $23.223 per barrel. He must post $480 in margin, a reduction of 19% from the outright ULSD futures margin requirements. The short ULSD crack position can profit whether crude oil price moves higher or lower and will be profitable if the price of ULSD declines more than the price of crude oil.

2) 3:2:1 crack spread

The 3:2:1 crack spread refers to a combination of ULSD and RBOB crack spreads, in a proportion that more closely matches the refined product yield from a barrel of crude oil. In the U.S., refineries typically produce more gasoline than diesel due to a combination of U.S. consumption preferences, refinery equipment and the type of crude consumed.

A long 3:2:1 crack spread consists of buying two contracts of RBOB plus one contract of ULSD and selling three contracts of WTI. This could also be thought of as two 1:1 RBOB cracks plus one 1:1 ULSD crack.

As with a 1:1 crack spread, to calculate the value of the crack, first multiply the prices of the Refined product futures by 42. Since the 3:2:1 crack involves three Crude Oil futures, to look at the crack spread on a per-barrel basis, divide the spread by three.

A long crack spread position profits when the price of ULSD and RBOB rise more than the price of WTI.

Trading the 3:2:1 crack spread

A trader has noticed significant selling pressure in the energy market over the past several days that appears to be led by refined products. He pulls up a chart of the continuous 3:2:1 crack and sees that the value has been trending down, reaching nearly $20 per barrel. He further notes that $20 was a low point in the crack the prior year, with values tending to hover near $25. When crack spreads are low, refineries may not have sufficient profit to operate.

The trader decides to place a buy order for the 3:2:1 crack, using the combination of trades below.

Trade Notional Capital Required
Buy 2 MRBV4 at 2.2457 $18,863.88 $1,245
Buy 1 MHOV4 at 2.2595 $9,489.90 $727
Sell 3 MCLV4 at 74.45 $-22,335.00 $1,736
Long 3:2:1 Crack    $1,451

The trader is long the 3:2:1 at $60.19 or $20.06 per barrel. He must post $1,451 in margin, a reduction of 26% from the outright Refined products futures margin requirements. He will profit if the prices of ULSD and RBOB rise faster than crude oil.

Ten factors affecting crack spreads

Common with other spread trades, a crack moves higher when there is more buying in the long leg of the spread than there is in the short leg of the spread. Below are 10 factors traders that can drive RBOB or ULSD cracks higher or lower.

# ISSUE TYPICALLY AFFECTS CRACK SPREAD TENDENCIES
1 Refinery maintenance or unplanned downtime such as from hurricanes Refined product supply, crude oil demand Crack strength
2 Geopolitical tensions Crude oil supply, crude oil risk premium Crack may weaken initially — crude rises more quickly than products
3 Winter seasonality Refined product demand, gasoline supply ULSD crack strength, RBOB crack weakness
4 Slowing economic growth ULSD demand ULSD Crack weakness
5 Strong sustained product demand Strong sustained product demand Crack strength
6 Environmental regulation on tighter product specifications Tightening of product supply Crack strength
7 Rising prices of competing heating fuels like LNG and propane ULSD demand, in winter ULSD crack strength
8 Decreases in U.S. road travel  Gasoline demand RBOB crack weakness
9 Summer seasonality Gasoline supply and demand RBOB crack strength
10 Currency weakness or positive macroeconomic surprises Crude oil strength Crack weakness

Crack spreads offer traders an additional way to trade Refined products futures and to profit from the unique factors that influence gasoline and diesel markets. For a deeper look at trading crack spreads, consult CME Group’s Introduction to Crack Spreads.


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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