With the driving season set to kick off over Memorial Day weekend, record-high gasoline prices are a nightmare for U.S. households (and Biden) but are of little concern for refiners who continue to churn a profit.

The chart above shows the recent and rather remarkable increase in the 3:2:1 Crack Spread; a metric used to gain insight into profitability and estimate short-term profit margins for oil & gas refiners. The spread measures the difference between the purchase price of crude oil and the selling price of refined products, such as gasoline, distillate fuel, and diesel. It is important to note that the spread does not include other variable or fixed costs.

Various different crack spreads are used to estimate profitability depending on what is set to be produced from the barrel of crude. Some spreads consider that one barrel gives you one barrel of gasoline, leading to a 1:1 crack spread. Whereas the 3:2:1 crack spread, often considered the most appropriate metric, notes that refining three barrels of crude oil produces two barrels of gasoline and one of diesel.

The crack spread, however, goes beyond simple informative purposes as it allows refiners and non-integrated marketers, who are caught between two highly volatile markets, the opportunity to hedge their risks.

Participants can either go long or short the crack spread. If you are long, you expect the crack spread will widen, meaning refining margins are growing because crude oil prices are falling or demand for the refined products is growing. Being short the crack spread means you expect that the demand for refined products will weaken or the spread is tightening due to an increase in input (crude oil) prices, thus you would sell the refined product futures and buy crude oil futures.

Sanctions on refined products from Russia, structural tightness and lack of supply in the market, maintenances and strong demand for refined products have recently pushed the spread to record highs.

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