Crack Spread

The crack spread is the price differential between crude oil and refined petroleum products such as gasoline, diesel, and jet fuel — representing the gross refining margin earned by an oil refinery. The term originates from the refinery process of 'cracking' crude oil molecules into lighter refined products. A common crack spread formula is the 3-2-1 crack spread: (2 × Gasoline Price + 1 × Distillate Price) – 3 × Crude Oil Price. A widening crack spread signals improving refinery profitability, while a narrowing spread compresses margins. In India, the crack spread is relevant for investors analysing the profitability of oil refining companies such as Reliance Industries, Indian Oil Corporation, and BPCL. Crack spreads are also used as hedging instruments by refiners to lock in margins on future crude oil purchases and refined product sales, protecting against adverse movements in the crude-to-product price relationship.