[authors: Tiffany Drane, Katie Brown]
thebrief™
Insurance professionals in the oil and gas refining industry should read this article to understand:
Executive Summary
A crack spread is a critical, real-time indicator for estimating refinery and petrochemical business interruption exposure. By comparing crude oil input prices with refined product values, a crack spread provides a market-based proxy for gross refining margin.
For insurance professionals, an analysis of crack spread data is particularly valuable early in a claim—when detailed financials may be unavailable—but also throughout the claim as market conditions evolve. Even modest movements in a crack spread can materially alter business interruption loss exposure.
Because a crack spread is driven by volatile global supply and demand factors, exposure at policy inception can differ substantially from exposure at the date of loss. Monitoring crack spreads helps ensure that business interruption estimates, reserve levels, and client expectations reflect current market reality rather than historical performance.
Understanding Crack Spreads in Energy Insurance Claims
A crack spread approximates a refinery’s gross margin by comparing crude oil prices to refined product prices such as gasoline and diesel. The most widely referenced benchmark is the “3:2:1” crack spread, which assumes that three (3) barrels of crude oil input yield two (2) barrels of gasoline and one (1) barrel of diesel.
When refined product prices rise relative to crude, the crack spread widens and margins strengthen. When crude costs rise faster than product prices, margins compress.
For insurance professionals, a crack spread offers a timely and objective way to understand margin conditions at the time of loss.
Crack Spreads – A Tool for Estimating Business Interruption Exposure
A crack spread can be a vital tool in estimating exposure for refinery and petrochemical business interruption (BI) claims. Changes in this metric can influence:
For large refineries, shifts of even $1–2 per barrel can translate into tens of millions of dollars in additional BI exposure.
Unlike an Insured’s financial statements, which may lag by months, daily crack spread data is publicly available, making it especially valuable for:
Example: Translating Crack Spread Data into Exposure
An incident occurs at a refinery with a crude capacity of 138,000 barrels per day, resulting in a 120-day shutdown.
Step 1: Throughput
138,000 barrels per day (BPD)
Step 2: Crack Spread Calculation (3-2-1)
Gasoline – U.S. Gulf Coast Gasoline Spot Price: $2 per gallon ($84 per barrel)
Diesel - U.S. Gulf Coast ULSD Spot Price: $2.50 per gallon ($105 per barrel)
Crude – WTI Spot Price: $77 per barrel
At $14 per barrel and 138,000 barrels per day, the daily refining margin estimate is approximately $1.9 million
Step 3: Outage Duration
Over 120 days, a potential gross margin loss can be estimated at $232 million
Step 4: Margin Sensitivity
Diesel spot prices increase $0.15 per gallon ($6.30 per barrel of diesel)
The 3-2-1 crack spread increases by $2.10 per barrel ($6.30 per barrel of diesel / 3 barrels of crude)
This sensitivity illustrates how crack spread volatility can signal material changes in business interruption risk exposure.
Crack Spread Volatility and Why It Matters
Crack spreads are influenced by global market dynamics that can shift rapidly:
Geopolitical Disruptions
International conflicts and supply disruptions can affect the spread between refined product prices and crude costs. U.S. refiners can uniquely benefit due to:
For beneficially positioned refiners, these dynamics can significantly strengthen margins during such crises and, in the event of a loss incident, amplify business interruption exposure.
Seasonal Demand Cycles
Summer gasoline demand and winter diesel demand affect pricing, margins, and crack spreads.
Claims occurring during peak seasonal demand periods can result in short-term increases in business interruption loss values.
Heightened Complexity: Losses During or After Planned Refinery Outages
Planned maintenance outages are typically scheduled during periods of lower seasonal demand. However, these periods may introduce non-obvious exposure risks:
A range of complexities can accompany losses occurring during or immediately following a planned outage:
For insurance professionals, these scenarios require careful consideration of current market and operational conditions.
Looking Ahead
We expect continued advancement in tools that automate crack spread monitoring and initial business interruption exposure estimates, making these capabilities increasingly standard across the industry.
As automation handles more of the mechanics, the value of insurance professionals will lie less in performing calculations and more in interpreting them. Applying professional judgment in ambiguous situations will remain essential.
Crack spread data will inform the analysis, but experienced practitioners will continue to determine what those market signals mean in the context of a specific loss.
Conclusion
A crack spread is a foundational metric for understanding the financial impact of refinery and petrochemical outages. For insurance professionals, it provides a timely lens into BI exposure when traditional financial data is delayed or incomplete.
Understanding how a crack spread behaves, particularly around geopolitical events, seasonal demand, and planned outages, enables more accurate reserve setting, clearer client communication, and stronger risk management throughout the life of a claim.
Acknowledgments
We would like to thank our colleagues Tiffany Drane and Katie Brown for their insights and expertise.
References
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https://www.eia.gov/finance/markets/products/prices.php
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https://www.eia.gov/petroleum/
1 Cracking generally refers to the process by which crude oil is broken down or refined into various higher-
value products.
