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Rbob Gasoline Brent [REPACK] Crack Spread Futures

The role of the refiner should not be underestimated as it allows crude products to be altered into a consumable good such as gasoline, diesel fuel or jet fuel. The refiner, just like the producer and consumer is incentivised by profits. Fortunately, traders can evaluate refiners profits by analyzing the margins they produce. The profit margins a petroleum refiner sees is referred to as the crack spread. One of the most well-known refinings crack spreads is the RBOB/Brent crack spread.

rbob gasoline brent crack spread futures

RBOB became the benchmark in the United States largely because of legislation banning gasoline with the chemical MTBE which was found in unleaded gas prior to legislation. MTBE was tied to the pollution of groundwater which threatened the health and safety of humans and wildlife. Since the legislation was introduced in the United States, RBOB futures has even become the new benchmark gasoline futures contract.

Each RBOB futures contract contains 42,000 of gasoline. RBOB futures contracts trade in US dollars per gallon. The smallest tick size for each contract is 0.0001 per gallon = $4.20. The Chicago Mercantile Exchange provide the most liquid RBOB contract.

The term crack spread describes the difference between the value of gasoline and crude oil. The refining process turns crude oil into crude oil products. This activity is known as the downstream process of oil and gas companies. In the refining process, crude oil is heated and introduced into the distillation tower. In the tower, oil is broken down into various petroleum products. Liquids and gases are separated into components by weight and boiling point. The lightest components, such as gasoline rise to the top while the heaviest components, such as residual oil, fall to the bottom. Light components include gasoline, which is condensed from a gas back into a liquid.

The weekly chart of the RBOB Brent crack spread shows that at times the crack was as high as $28 dollars per barrel and as low as -$5.5 per barrel. When the crack spread is negative there is no incentive for refiners to purchase and refine Brent oil. This generally occurs during a recession or Brent oil is artificially buoyed by supply disruptions. When the crack spread is elevated and the price is well above the cost for refiners to convert Brent into RBOB, there is a large incentive to purchase and refine as much crude oil as possible.

Crack spread is a term used on the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted from it. The spread approximates the profit margin that an oil refinery can expect to make by "cracking" the long-chain hydrocarbons of crude oil into useful shorter-chain petroleum products.

In the futures markets, the "crack spread" is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more derivative products, typically gasoline and heating oil. Oil refineries may trade a crack spread to hedge the price risk of their operations, while speculators attempt to profit from changes in the oil/gasoline price differential.

One of the most important factors affecting the crack spread is the relative proportion of various petroleum products produced by a refinery. Refineries produce many products from crude oil, including gasoline, kerosene, diesel, heating oil, aviation fuel, bitumen and others. To some degree, the proportion of each product produced can be varied in order to suit the demands of the local market. Regional differences in the demand for each refined product depend upon the relative demand for fuel for heating, cooking or transportation purposes. Within a region, there can also be seasonal differences in demand for heating fuel versus transportation fuel.

For simplicity, most refiners wishing to hedge their price exposures have used a crack ratio usually expressed as X:Y:Z where X represents a number of barrels of crude oil, Y represents a number of barrels of gasoline and Z represents a number of barrels of distillate fuel oil, subject to the constraint that X=Y+Z. This crack ratio is used for hedging purposes by buying X barrels of crude oil and selling Y barrels of gasoline and Z barrels of distillate in the futures market. The crack spread X:Y:Z reflects the spread obtained by trading oil, gasoline and distillate according to this ratio. Widely used crack spreads have included 3:2:1, 5:3:2 and 2:1:1.[1] As the 3:2:1 crack spread is the most popular of these, widely quoted crack spread benchmarks are the "Gulf Coast 3:2:1" and the "Chicago 3:2:1".[citation needed]

Various financial intermediaries in the commodity markets have tailored their products to facilitate trading crack spreads. For example, NYMEX offers virtual crack spread futures contracts by treating a basket of underlying NYMEX futures contracts corresponding to a crack spread as a single transaction.[2] Treating crack spread futures baskets as a single transaction has the advantage of reducing the margin requirements for a crack spread futures position. Other market participants dealing over the counter provide even more customized products.

The following discussion of crack spread contracts comes from the Energy Information Administration publication Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity Industries:[3]

CHICAGO, March 16, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse energy marketplace, today announced two new Brent crude futures crack spreads to be listed with implied functionality on CME Globex for trade date on March 28, 2011.

Beginning Monday, Mar. 28, market participants will be able to hedge benchmark RBOB Gasoline futures (RB) and Heating Oil futures (HO) against NYMEX Brent Crude Oil Last Day Financial Futures (BZ). The new crack spreads will be available for electronic trading only on CME Globex (RB:BZ and HO:BZ).

"The listing of these new Brent crude crack spreads builds on our strong commitment to meeting the needs of customers by extending our already robust slate of intercommodity crude oil spreads," said Joe Raia, CME Group Managing Director, Energy & Metals Products. "Customers now have the ability to trade crack spreads on both WTI and Brent futures on a single trading platform and gain greater margin efficiencies."

We can now move to the final step of the analysis by revisiting the relationship between predicted gasoline prices based on Brent crude oil prices and actual prices. This comparison was first presented in the August 28 farmdoc daily article and is updated through September 2015 in Figure 4. This chart clearly shows that actual gasoline prices started to jump well above predicted prices in early in 2015, with the gap averaging $0.36 per gallon over March through August. This time period almost exactly lines up with the period of elevated crack spreads, strongly suggesting that the higher refining margins were ultimately passed on to gasoline consumers in the form of higher prices at the pump. It is interesting to note that the gap between predicted and actual gasoline prices declined from an average in August of $0.61 per gallon to an average in September of $0.32 per gallon.

Retail prices for gasoline and diesel in the U.S. have been elevated relative to crude oil prices for most of 2015. A review of the pertinent data suggests this can be explained as follows: i) improving economic growth in the U.S. and the recent plunge in crude oil prices spurred a notable jump in gasoline and diesel quantity demanded; ii) the jump in gasoline and diesel quantity demanded pushed capacity utilization rates for the U.S. crude oil refining industry to high levels by historical standards; iii) high capacity utilization rates caused refining margins, as measured by the crack spread, to increase sharply; and iv) the increase in refining margins resulted in relatively high retail gasoline and diesel prices compared to crude oil prices. The good news for U.S. gasoline and diesel consumers is that the pressure on refining capacity appears to be lessening, as indicated by the sharp drop in crack spreads since mid-August. Combined with the normal seasonal drop in miles driven in the autumn and winter months, this should continue to pressure gasoline and diesel prices relative to crude oil prices.

The Crack Spread is a spread trade in crude oil, gasoline, and ultra low sulfur diesel futures contracts that roughly mimics the refiners margin. Like the soybean crush and cattle crush, it can be used to hedge or speculate on these margins. The spread trade consists of a 3-2-1 ratio. Three contracts of crude oil, two contracts of RBOB gasoline, and one contract of Ultra low sulfur diesel.

In the figure above we plot the historical 3:2:1 crack spread using the nearby WTI, RBOB, and Ultra low sulfer deisel futures contracts from the NYMEX. To compute the 3:2:1 crack spread in $ per barrel use the following formula:

The exercises for this chapter have us forecast the crude oil crack spread using time series econometric techniques on NYMEX futures prices for WTI crude oil, RBOB gasoline, and ultra low sulfer deisel (ULSD). We will utilize the following regression model:

where \(Crack Spread_t\) is defined as in equation 1, and the remaining variables are first differences of logged prices (\(\Delta Crude_t-1 = ln(Crude_t-1) - ln(Crude_t-2)\)). Recall from chapter 17 that in order for the statistical properties of the variables we are using to be appropriate for the linear regression we need all the variables to be stationary. That explains why we used the first differences of logged prices of the component prices in the crack spread, since futures prices are often found to be non-stationary and first differences of logged prices are usually stationary.

Crack spreads reflect the margins refineries receive for processing one barrel of crude oil into oil products. Consumers directly or indirectly purchase oil products, including gasoline and distillates. Distillates include heating oil, jet, diesel, and other fuels.


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