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Friday, July 17, 2026

Trading the 5-3-2 Crack Spread

By Century Financial in 'Investment Insights'

Trading the 5-3-2 Crack Spread
Trading the 5-3-2 Crack Spread

In a nutshell:

  • Refineries convert Brent crude oil into refined products such as gasoline and low sulphur gasoil (LSGO). With global refining capacity already stretched, refiners are struggling to meet resilient fuel demand.
  • As a result, gasoline and LSGO prices are expected to outperform Brent crude, leading to wider refining margins.
  • This creates an opportunity through the European 5-3-2 crack spread, which involves going long gasoline and LSGO while shorting Brent crude in the corresponding ratio.
  • The 5-3-2 crack spread currently stands at $61.34. Further widening of the spread, supported by ongoing refining capacity constraints, could enhance the trade's return potential.
  • The trade currently offers a positive net holding cost of $10,042, equivalent to an annualized 3.70% on the total net exposure of $271,268.
  • Even if U.S.-Iran tensions ease, a sharper decline in Brent crude than in refined product prices could continue to support the short Brent leg of the strategy.
 

Macroeconomic Rationale

The ongoing U.S.-Iran tensions have brought commodities back into focus. However, it is not only crude oil which has captured the attention of traders, but refined products like diesel, gasoline, and LSGO. What’s interesting to note is that when a ceasefire deal was struck between the warring nations, crude oil prices edged lower amid expectations that traffic would flow smoothly through the Strait of Hormuz. However, the prices of refined products did not fall as much, and in fact have remained very resilient. This clearly shows that refining capacity is the core driver of prices rather than geopolitical tensions alone.

The traditional relationship between crude oil and refined products has diverged, with gasoline, diesel and jet fuel trading at a significant premium to crude. Fuel markets in both the U.S. and Europe are experiencing exceptional tightness as global refining capacity remains stretched amid resilient demand. Years of underinvestment have left the industry with limited spare capacity, leaving the market increasingly exposed to geopolitical shocks. Recent U.S.-Iran tensions have intensified these concerns, raising the risk of disruptions to energy flows through the Strait of Hormuz—a route that carries nearly 20%-25% of global oil consumption. Although the disruption remains contained, heightened risk premium has pushed refining margins and refined product prices higher.

Adding to this narrative are the recent Ukrainian drone attacks on Russian refineries, striking at least 19 facilities over the past two months, with a combined processing capacity of nearly 4.9 million barrels per day—around 70% of Russia's total refining capacity. The attacks have reduced Russia's diesel refining capacity by roughly one-third, alongside significant declines in gasoline and jet fuel production. Traditionally a major exporter of refined fuels, Russia has curtailed exports and is reportedly importing fuel from China and India, tightening global fuel markets. Meanwhile, crude that can no longer be processed domestically is increasingly being redirected to export markets, adding to global supply. While geopolitical tensions continue to underpin Brent prices, the additional crude supply is helping offset some of this upward pressure. Even if geopolitical tensions escalate further and crude prices rise, refined products are expected to remain comparatively better supported, as the primary bottleneck lies not in crude availability, but in the ability to convert crude into finished fuels.

5-3-2 Crack Spread vs. Brent: Refining Margins Continue to Outperform

Trade Overview

This has created a trading opportunity in the form of the 5-3-2 European crack spread. The trade involves taking a long position on gasoline and LSGO, while simultaneously taking a short position on Brent. The table below illustrates the recommended position sizing used to replicate a standard 5-3-2 crack spread. Each leg is scaled according to the refinery yield ratio, resulting in the appropriate notional exposure for crude oil, gasoline and heating oil.

Note - For consistency, all products are expressed in barrels when calculating the 5-3-2 crack spread. While Brent is naturally quoted in barrels, LSGO is quoted in metric tonnes and gasoline in gallons, requiring unit conversions before the spread can be computed.

Commodity Direction Price* Price Per Barrel ** Ratio No. of Barrels
(Parts * Ratio)		 Notional
Exposure
Brent Short $86.07 $86.07 5 1,162 $100,000
Gasoline Long $3.30 $138.46 3 697 $96,527
LSGO Long $1,198.08 $160.82 2 465 $74,741
$271,268

* Price reflects the price on the Century Trader Platform as of 15 July 2026.

** 1 barrel = 42 gallons and 1 metric tonne = 7.45 barrels. Brent is already priced in barrels; hence, the conversion is done for the remaining commodities.
Note - The crack spread ratio is in barrels, not dollars. The crack spread is not a dollar-neutral trade. It’s a production-weighted trade based on refinery yields.

Current Spread

Calculating the Current Spread

A refiner buys 5 barrels of crude oil and, through the refining process, turns them into roughly 3 barrels of gasoline and 2 barrels of LSGO.

The "crack spread" is the gross margin the refiner captures — the difference between what they sell the outputs for and what they paid for the crude input.

Leg Price per Barrel Ratio Weighted Value
Brent $86.07 5 -$430.33
Gasoline $138.46 3 $415.38
LSGO $160.82 2 $321.63
From five barrels $306.69
5-3-2 crack spread per barrel $61.34

The table illustrates how the current 5-3-2 crack spread is calculated. It assumes that a refinery converts five barrels of Brent crude into three barrels of gasoline and two barrels of LSGO. Based on current market prices, the spread stands at $61.34 per barrel, reflecting the gross refining margin available before operating and other costs.

Units on the Century Trader Platform

Leg Barrels Units on CFC
Brent 1,162 1,162
Gasoline 697 29,274
LSGO 465 63

The table above translates the required barrel exposure into the equivalent position sizes on the Century Trader platform.

Leg Barrels Price per Barrel Notional Exposure Holding Cost
per annum		 Holding Cost
Brent 1,162 $86.06 $100,000 -17.07% -$17,075
Gasoline 697 $138.46 $96,527 18.65% $18,011
LSGO 465 $160.81 $74,741 12.18% $9,106
$10,042
3.70%

The table outlines the indicative position sizes and annual holding costs for each leg of the 5-3-2 crack spread. While the short Brent position incurs a holding cost, the long gasoline and LSGO positions generate positive holding returns that more than offset this expense. As a result, the strategy currently offers a net positive holding return of $10,042 per annum, equivalent to 3.70% of the total net exposure.

Scenario Analysis and Potential Payoffs

The table below illustrates how changes in the 5-3-2 crack spread impact the overall profitability of the position.

Potential Payoff Based on Prospective Spread Changes
Spread Per Barrel Spread Change
from Entry		 Potential
Market Payoff		 Holding Cost Potential
Total Payoff		 Potential
Returns
$40.00 -$21.34 -$24,791.77 $10,042.29 -$14,749.48 -5.44%
$48.00 -$13.34 -$15,496.58 $10,042.29 -$5,454.29 -2.01%
$54.00 -$7.34 -$8,525.18 $10,042.29 $1,517.10 0.56%
$61.34 - - $10,042.29 $10,042.29 3.70%
$66.00 $4.66 $5,417.61 $10,042.29 $15,459.89 5.70%
$72.00 $10.66 $12,389.00 $10,042.29 $22,431.29 8.27%
$76.00 $14.66 $17,036.60 $10,042.29 $27,078.88 9.98%

Note: As the trade is sized to represent 1,162 barrels of Brent input under the standard 5-3-2 refinery ratio, each $1/barrel change in the 5-3-2 crack spread equates to an approximate $1,162 profit or loss on the overall position, excluding holding costs and transaction costs.

Disclaimer:Century Financial Consultancy LLC (CFC) is licensed and regulated by the Capital Market Authority (CMA) of the UAE under license numbers 20200000028 and 301044 to carry out the activities of Financial Products dealer, Trading Broker in international markets, Trading Broker of OTC derivatives and currencies in the spot market, Introduction, Financial Consultations, and Promotion. CFC is incorporated under UAE law, registered with the Dubai Economic Department (No. 768189), with its office at 601, Level 6, Building No. 4, Emaar Square, Downtown Dubai, UAE, PO Box 65777.

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