DTT Buzz

Prices at the pump reached a National average of $4.00 per gallon for the first time in US history last week. This, of course, has a lot of Americans on edge. Fuel costs (along with increased costs in food/utilities) have even led to an increase in the supply for labor, which resulted in the worst unemployment data in approximately 22 years last Friday.

If you think about it, gas prices were nearly $4 per gallon about one year ago. Crude prices were approximately $80 around the same time.

Why isn't the price of gas much higher now that Crude is trading at approximately $135?

The answer...The Crack Spread. The Crack Spread is simply defined as "the differential between the price of crude and petroleum products extracted from it." Basically, the spread measures the margin that refiners take per barrel of crude they refine. A high crack spread means a higher margin for refiners, and vice versa.

Right now, the crack spread is being squeezed in order to keep prices at the pump low relative to the price of crude. If the spread was equal to its level this time last year, we would be looking at $7 - $8 gas right now.

Bottom line: Monitor The Crack Spread!! If you begin to see some upside trending in the crack spread, be on the look out for higher prices at the pump assuming Crude does not move lower. A good way to profit off and increasing crack spread is to buy refiners such as VLO, TSO, ALJ, and HOC.

Regards,

Nick Fenton
Sr Trade Analyst