The 3:2:1 crack spread
The benchmark US Gulf Coast 3:2:1 crack spread fell by 4.4% in the week ended July 13, hitting $21.166 per barrel on Monday, July 13. On Monday, July 6, the spread was $22.143 per barrel.
The above chart illustrates the US Gulf Coast 3:2:1 crack spread over the last few days. The 3:2:1 crack spread reflects a theoretical calculation for the difference between the price of two barrels of gasoline and one barrel of distillate fuel, and the cost of three barrels of crude oil that these products are assumed to be produced from.
Crack spreads usually decrease when product prices increase by less than the price of crude oil, or when the price of crude oil falls by less than product prices.
Why watch crack spreads?
Crack spreads represent the price difference between refiners’ revenues—derived from the sale of finished refined products—and refiners’ costs—the price of crude oil. So, they’re an important metric that drives refiner profitability and market valuation. This is something investors in refiner stocks should watch.
A wider crack spread increases the profit margins of refiners such as Valero Energy (VLO), Phillips 66 (PSX), Marathon Petroleum (MPC), and Tesoro (TSO). It enables them to purchase raw materials or inputs—crude oil—at a lower rate and sell the refined products—gasoline and diesel—at higher prices.
Together, the companies mentioned above make up ~7% of the iShares U.S. Energy ETF (IYE).
These refiners have spun off some of their midstream assets to form MLPs (master limited partnership), including Valero Energy Partners (VLP), Phillips 66 Partners (PSXP), MPLX LP (MPLX) and Tesoro Logistics (TLLP). A higher crack spread also indirectly benefits these companies, as higher volumes produced by their refining parents—in case they choose to take advantage of the higher margins they are getting—would mean more volume to transport. This would boost the revenues of these MLPs.
For more on crack spreads, read Crack Spread 101 (Part 1: What’s a crack spread?
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