Simply put, most refineries use the cracking ratio X:Y:Z to hedge, where X, Y and Z represent the barrels of crude oil, gasoline and distillate fuel respectively. The restriction condition is X = Y+Z. In practice, the refinery will buy X barrels of crude oil in the futures market and sell Y barrels of gasoline and Z barrels of distillate fuel. Cracking price difference is actually the price difference obtained by trading crude oil, gasoline and distillate fuel according to the ratio of X:Y:Z Y: Z Y: Z. The widely used cracking ratios are 3:2: 1, 5:3:2, 2:1. Because 3: 2: 1 is the most popular cracking spread, the most widely traded cracking spread benchmarks are "Gulf Coast 3:2: 1" and "Chicago 3:2: 1".
Many financial intermediaries in the commodity market have customized their products to promote split spread trading. For example, NYMEX (the New York Mercantile Exchange) provides a virtual split spread futures contract. This virtual contract combines many futures contracts related to split spreads into one trading contract. The advantage of this single contract is that it can reduce the margin requirement for trading split spread futures. Other over-the-counter market participants also offer more kinds of custom contracts for differences.
The following paragraph is taken from the publication Derivative Products and Risk Management in Oil, Gas and Electric Power Industry of Energy Information Administration:
The profit of a refinery is directly related to the price difference between crude oil and refined oil. Because refineries can accurately predict all other costs except the cost of buying crude oil, this price difference has become their biggest uncertainty. One way to control risks is to buy crude oil futures and sell refined oil futures. Another way is to buy call options for crude oil and sell put options for refined oil. Both of these strategies are complicated, and the funds used for hedging will also be locked in the margin account. In order to reduce the transaction burden, NYMEX (the New York Mercantile Exchange) started the price difference fission contract at 1994. NYMEX regards the trading of various futures in this contract as a transaction and requires a fixed margin. The contract helps refineries lock in the prices of crude oil, fuel oil and unleaded gasoline at the same time to establish a fixed refining profit. One spread contract binds three-hand crude oil futures (30,000 barrels), two-hand unleaded gasoline futures (20,000 barrels) and 1 hand-burned oil futures (1 10,000 barrels). This ratio of 3-2- 1 simulates the actual refining output-three barrels of crude oil produce two barrels of unleaded gasoline and one barrel of engine oil. The buyer and seller who break the contract only need to consider the deposit of this contract, and do not need to consider the respective deposits of various commodities involved in the contract. The ratio of 3-2- 1 based on light crude oil cannot meet the needs of all refineries, however, OTC (over-the-counter market) provides customized contracts for various situations. Because refineries are different, some specialize in producing heavy crude oil, while others focus on gasoline, OTC traders usually aggregate individual refineries to provide a portfolio close to their average output rate. Traders will also design unique hedging transactions according to the specific situation of customers and the standard of output rate.