As the most important commodity on the planet, crude oil has limited use in its original form. There isn't a lot you can do with crude oil right when it comes out of the ground; instead, it needs to be processed in a refinery where it is turned into the refined petroleum products that drive modern economies such as gasoline and diesel fuel for vehicles, jet fuel for airplanes, and asphalt for roads. These are the use cases that make crude oil so valuable. 

The price of crude oil impacts the price of these refined products. The price of gasoline at the pump includes the original cost of the crude oil, processing and transport costs, taxes, as well as profits for the refiner and final seller. In the U.S., the original cost of the crude oil is the primary factor in the price consumers end up paying. 

At the same time, there’s also a feedback loop from the price of refined products back to the crude oil price. When consumers stayed home during the COVID-19 pandemic, demand for transport fuels collapsed. Refiners didn't need to make as much gasoline, so they reduced their crude oil purchases which impacted the supply and demand balance and sent crude oil prices down. 

In the oil markets, the difference between the price of crude oil and the price of refined products is called the crack spread. The name comes from the fact that crude oil refineries crack the original crude oil molecules to produce products like gasoline. The crack spread is a measure of refinery profitability; therefore, the value of crack spreads is important to the oil markets.  

If the gasoline and diesel crack spreads are low, or even negative, something needs to change so refineries can stay in business and continue to make refined products. Either crude oil prices need to fall, or the price of refined products need to rise to compensate. Regardless of which scenario happens, weak crack spreads are bearish for the demand for WTI. A strong crack spread means that refineries are very profitable, so they’ll want to maximize their production of refined products and consumption of crude oil. This high demand can be bullish for the price of WTI. 

You can track the performance of crack spreads by carefully watching the relationship between the price of the WTI versus the price of key refined products at CME Group, like RBOB Gasoline futures and the ULSD Diesel futures.