Dollars and Jens
Wednesday, August 01, 2007
Futures traders refer to the price difference between the distillates of oil and the price of the oil itself as "the crack" -- it essentially represents the economic value of the "hydrocracking" done by oil refiners. Sometimes traders will bet on changes in this spread; if they think the value of refining will go down, they can buy 3 futures on oil for delivery one month and sell 2 on gasoline and 1 on heating oil for the following month. If they think refining will become more valuable, they can bet the other way.
That's your background for this:
If you're like most American motorists, you've noticed two things lately: Oil prices are at record highs, yet gasoline prices have dropped.I'm pretty sure it was less than two months ago that I was reading articles about the opposite situation, when the price of the distillates of a barrel of oil were selling for $30 more than the oil, where $10 is a more historically typical level. There was, in fact, an article on money.cnn.com trying hard to explain why there wasn't a bigger move to build more refinery capacity, what with it being so profitable and all; they did note that there was no guarantee it would stay at those levels. I looked at the futures at that time, and noticed at the time that December futures for distillates were $13 more than November futures for oil; just six months out, market participants were expecting a reversion to pretty much historical levels. Taking a quick look at futures now, the September oil / October distillates spread is down to $8 a barrel.
Over the last two months, U.S. crude has gained nearly 25 percent, and is now just pennies away from its all-time high. Yet gasoline futures have lost 7 percent over the same time. Retail gasoline prices have fallen even further, declining 11 percent from the all-time high set in May.