Crack/Crush Spread. long, where, question, practice, something

RoastBeef

Schweser had a Q-Bank question where the participant went long, heating oil and gasoline, short crude.

Is that something that can happen in practice?

Can you go long the outputs short the inputs?

Colum

bpdulog Wrote:
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> Why couldn't you? Depends on what your
> expectations are. Are the inputs relative the
> outputs expensive or cheap?

The idea of the crush spread is you buy the inputs and sell the outputs as you lock in your prices as a refiner or someone who makes soy bean oil.

I am a crude refiner who buys crude all day. I make heating oil and gasoline. I buy t1 oil and sell t2 heating oil and gasoline. Thus locking in today's prices.

I completely understand selling heating oil and gasoline naked as I can deliver both of those. I don't produce crude so how can I deliver on my crude contracts and I can't convert my heating oil back crude either. Seems like it is not a hedged position.

"For integrated oil companies that control their entire supply chain from oil production to retail distribution of refined products, there is a natural economic hedge against adverse price movements. For independent oil refiners which purchase crude oil and sell refined products in the wholesale market, adverse price movements can present a significant economic risk. Given a target optimal product mix, an independent oil refiner can attempt to hedge itself against adverse price movements by buying oil futures and selling futures for its primary refined products according to the proportions of its optimal mix."

I just don't get how you can sell oil and buy the outputs and that somehow works.

Analti_Calte

What if you're a hedge fund arbitrageur?

NO EXCUSES

bboo

janakisri Wrote:
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> 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. CME Soy crush also is
> tradeable I believe ( Soy input=beanoil+crush)

But if you took the other side of that and went long bean oil crush, short soy, that would be bad no? You can't turn soybean oil back into soybeans for delivery.

It's not even in the book so I doubt it would show up, I just put that as the answer and was shocked that Schweser said it was correct and a crack spread was going short crude oil, long heating and gasoline.



Edited 1 time(s). Last edit at Friday, May 27, 2011 at 04:27PM by Paraguay.

lcai

Why couldn't you? Depends on what your expectations are. Are the inputs relative the outputs expensive or cheap?

NO EXCUSES

bodhisattva

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. CME Soy crush also is tradeable I believe ( Soy input=beanoil+crush)

strikethree

why not? If there is a futures you can do it.

mik82

markCFAIL Wrote:
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> why not? If there is a futures you can do it.

You can't turn heating oil and gas back into oil.

You turn crude into heating oil and gas by cracking it.

I understand you can do it with the futures but it would seem this is not a hedge and has huge risk.