Understanding the Crack Spread - Your Key to High Probability Oil Market Trades

In this article, you will learn how to follow the crack spread so that you can accurately predict where oil refinery stocks are headed. The crack spread is a reliable predictor of stock prices of refinery stocks, and by following it you'll be able to make high probability trades in the oil market.

Every trader loves a high probability trade setup, like the crack spread. When refining margins increase, traders look to take advantage of this signal with an increased appetite for energy stocks and commodities. It's no surprise that when indicators show signs that oil refining is profitable again, traders jump at the chance. The increase in refining margins are an excellent way to gauge the success of oil-related products and services – indicating where money is in the refining process allowing traders to follow these market dynamics to find great trades. Now more than ever we need to understand how these changes can affect our strategies as investors because it gives us valuable insight into predicting future trading opportunities. This blog post will explore what rising refinery margins mean for a trader looking to take advantage of them and why they should pay attention now!

What is a 3 2 1 Crack Spread?

The simple 1:1 crack spread, one of the most basic types of crack spreads, provides an indication of refinery profit margins between refined products such as gasoline or diesel and crude oil prices. Enterprises can lock the spot price of finished products to take advantage of this differential by purchasing crude oil futures while simultaneously selling refined product futures. Such spread trades are quoted in dollars per barrel and take into account the amount of 42 gallons that can be produced from a single barrel of crude oil. When the value of refined products is larger than the corresponding price for crude oil, a positive gain is achieved from this trading approach.

Crude oil prices have a direct impact on 3 2 1 crack spreads which are futures contracts that involve three parts: three crude oil futures contracts, two gasoline futures contracts, and one ultra-low sulfur diesel (ULSD diesel) future contract. Professional traders use diversified crack spreads as part of their directional trading strategies in order to create a balanced portfolio. Additionally, hedge funds may opt for using a more diversified approach, such as the 5 3 2 crack spread trade, to act as hedges against the equity value of refiners. Taking into account these diversified options can help traders in creating a blueprint towards making better informed decisions and mitigating risks within their portfolios.

Understanding Crude Oil and Crude Oil Prices

The WTI crude oil price and its principal refined products has always been unpredictable and immensely volatile, as these prices are influenced by various aspects related to supply, demand, production economics, and government regulations. When the prices of crude increase but the prices of oil refiners stays constant or even drop, it results in a narrow crack spread that poses tremendous risk to refiners and non-integrated marketers who are invested on both sides of the market. In such cases, they face a bigger level of financial danger than those firms which only deal with raw crude oil or only cover the wholesale and retail markets. As such, it's incredibly important for oil companies, specifically oil refineries who deal in heating oil, and others to be equipped enough in terms of knowledge and skill to manage such risks properly so that their business operations remain profitable over long periods of time.

Using a Crack Spread to Hedge Price Risk

The key to success for a refinery executive is their ability to effectively hedge the difference between their input costs and output prices. Crack Spread, which is referenced as such due to the refining process that extracts crude oil into its primary refined products, is the petrol industry's term for this spread. It encompasses the price of crude oil and its derived refined products – gasoline, diesel and jet fuel – which can fluctuate in accordance to independent factors such as supply, demand and production economics. Therefore it is imperative that refiners understand these variables in order to make well-informed decisions around hedging Crack Spread, set achievable goals and remain profitable.

The Crack Spread is a simple yet powerful tool to trade oil refinery stocks, offering a high probability of success and profits. This reliable yearly opportunity involves predicting where oil refinery stocks are headed, allowing you to make money with minimal effort. By following simple step-by-step instructions, you can take advantage of the Crack Spread’s varying prices which are inversely related to the price of crude oil. While there will be risks involved with trading the Crack Spread, it is one of the best opportunities available for those who understand how it works and choose wisely when investing. With careful planning and analysis, you can leverage your knowledge to profit from the Crack Spread.

Results from 2022 | Trading the Crack Spread With Crude Oil Refiners $PSX

Crack Spread is a very popular trading strategy and it can be extremely effective in predicting the movement of oil refinery stocks. In this video, I'm going to show you how the Crack Spread is used as a tool to trade oil refineries. Crack Spread is simply the difference between the prices of crude oil and refined products such as gasoline and diesel fuel. Following Crack Spread, investors can accurately predict where oil refinery stocks are going and make sound trading decisions that have the potential to yield strong returns. Throughout this video, I demonstrate Crack Spread utilizing our 3 2 1 Crack Spread with the refiner $PSX in trades from 2022.

With the various Crack Spreads, you know exactly what kind of positions to take when investing in refinery stocks – so don't miss out on learning more about Crack Spread in my video now!

When ‘buying' the spread this would involve buying refined products and selling crude oil should its value rise – for instance from $5 per barrel increasing to $6. Conversely if ‘selling', then one would be doing exactly the opposite; which means essentially expecting prices will fall (from an example of say 5 dollars down to 4).

High Probability 3 2 1 Crack Spread Trading

Matt had been an experienced stock market trader for years, but he was always looking to gain the upper hand. When he was finally able to learn the crack spread trade in 2022 – Matt knew it could be what he'd been searching for. The crack spread is used by refineries and financial professionals alike as a way to assess profitability; if their profits are lucrative, that means their stocks will usually perform well- creating exciting opportunities for investors like Matt!

Trading had never felt so easy. By tracking the “crack spread,” an avid investor could literally watch refinery profit margins fluctuate in real time, just like following Apple or Google! It seemed almost too convenient to be legitimate – it was as if you'd found a secret cheat code for success trading.

Despite some wariness about this new method of investing, other traders were having great results using it…so why not take a shot?

The crack spread is a great example of a high probability trade setup that every trader loves. When refining margins increase, traders look to take advantage of this signal with an increased appetite for energy stocks and commodities. It's no surprise that when indicators show signs that oil refining is profitable again, traders jump at the chance.

At Masters in Trading, we teach our students how to follow the crack spreads, and to understand the difference between the crack spreads in 5 STAR TRADES.  Learn more about our program and how you can take advantage of this high probability trade.