AM-05-55 A New Proxy for Coking Margins – Forget the Crack Spread

Description:

The so-called “3-2-1 crack spread” has been used for many years by refining industry analysts as a broad-based indicator of the economic incentive to convert crude oil into finished products. Unless you simply burn it, crude oil in its natural state is of no use to consumers—it must be transformed, through the process of refining, into products that are needed and can be used in the marketplace. In order to cover the costs of that transformation, including the substantial capital costs, there must be a “margin” or “spread” between what the products can sell for and the cost of the crude oil. Over the years, the 3-2-1 crack spread has become institutionalized as a simple, and easily calculated, measure of refining margins. However, some analysts incorrectly equate it to our current industry’s refining margins—an assumption that is often far from reality.