Over The Barrel: Focus on 3:2:1 Crack Spread
Introduction
The crack spreads, which compare product prices against the price of crude, can provide invaluable insights into the structure of the market. These spreads are generally representative of the profit margins of refining crude into related products. Although not all encompassing, the 3:2:1 crack is generally the most representative of the margin.
Average yield of products from a barrel of oil is typically broken down as follows:
Gasoline | 43.0% |
Heating Oil & Diesel | 21.5% |
Residual Fuel Oil | 11.5% |
Jet Fuel & Petrochemicals | 11.6% |
All Others | 12.4% |
These figures are only averages, since the type of crude and refining method will have a dramatic impact on the ultimate ratios. In any case the output of gasoline is approximately twice that of No. 2 Heating Oil and Distillate. The price of the spread is calculated as follows, the result of which is the approximate profit margin per barrel of crude oil:
[(2 x RBOB x 42) + (HO x 42) - (3 x CL)] / 3
The 3:2:1 crack showed considerable volatility as the year wore on. In the spring, fears that refinery capacity would be tight helped lift the May 3:2:1 crack to record highs of over $30. The spread has fallen considerably as the forward structure of crude moved from a carrying charge into inversion, and fears of refinery outages eased on the West coast and Midwest.
Current prices based on 3 November crude to 2 November gasoline and 1 November heating oil, have fallen to $7.23 per barrel. The dramatic decline has raised concerns that crude tightness and associated high prices will ultimately adjust demand downward for products.
The back months have not shown weakness on the scale that the nearby 3:2:1 crack has. As the chart displays, the May 2008 3:2:1 crack has maintained a price near $15.00, well above the levels of $12.00 that the May 2007 3:2:1 crack traded at in October of 2006.
3:2:1 Crack Price Outlook
Key consideration in the outlook for the 3:2:1 crack valuation:
- The ability for refinery utilization rates to recover toward the 93 percent level.
- Impact on demand of higher gasoline prices, which have recently stabilized at relatively high levels.
- Impact on nearby crude prices of recent OPEC production increases.
- Prospective tightness in crude oil supplies in 2008.
- Availability of imported gasoline and blending components to supplement U.S. domestic supplies.
- Heating oil and diesel demand prospects.
Overall, the May 3:2:1 crack looks to be fairly valued. Further pressure on the downside into the 12.00-14.00 level is likely to encounter support, with a good chance that seasonal lows will be reached this quarter, particularly if temps tend to be above normal.
If you have questions/comments about Over The Barrel, please contact Steve Platt at 1.877.377.7931 or stephen.platt@archerfinancials.com.
The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company. Copyright © ADM Investor Services, Inc.
Charts Courtesy of DTN
