Dollars and Jens
Wednesday, August 01, 2007
"the crack"
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.

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.
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 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.

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