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What is commodity-product spread?

What is commodity-product spread?

The commodity-product spread is the difference between the price of a commodity and the price of the products at the next level of consumption which is made from the commodity.

In the oil industry, this is known as the crack spread, in the soybean industry, it is known as the crush spread. Some pre-packaged long/short futures strategies that trade on this spread are offered on futures exchanges.

The commodity-products spread is the difference in prices between a raw material and a product made from it, such as raw crude and gasoline. This difference gives a rough estimate of production costs and profit margin.

Traders can buy and sell futures in a strategy with one leg on the price of the raw commodity and one or two legs on the price(s) of product(s) created from it, and these positions are sometimes sold as a package with one aggregate margin calculation.

In the oil industry, the spread for production/refining is known as the crack spread because the process of refining involves “cracking” the carbon chains in the crude oil. A 3-2-1 crack spread is a ratio spread that assumes 3 barrels of crude will produce 2 barrels of gasoline and 1 barrel of distillate fuel.

Using the prices of the those three to compute the average spread per barrel can serve as an index.

What is a Time Spread?
What is a Vertical Spread?

Keywords: commodity, demand, supply and demand,