Crude Oil Crack Spread

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The speaker discusses the crude oil crack spread and explains how a petroleum refiner will use the crack spread to lock in the cost of oil and output prices.  The crack spread will involve buying the crude oil futures and shorting the natural gas and/or heating oil futures.  Traders have different ratios of buying an The speaker discusses the crude oil crack spread and explains how a petroleum refiner will use the crack spread to lock in the cost of oil and output prices.  The crack spread will involve buying the crude oil futures and shorting the natural gas and/or heating oil futures.  Traders have different ratios of buying an selling the futures, for example, a 2-1-1, or a 5-3-2.  Essentially, this trade locks in a profit for refiners for the future.  They are essentially locking in a buy price for their crude oil and a selling price for their natural gas and heating oil outputs.  Internal costs to produce are then subtracted from this crack spread and a net profit is realized.

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