An Introduction to Futures Spreads
Table of Contents
Many market participants need to hedge against relative changes in prices rather than absolute changes. For example, if your firm refines oil they only care about the relative price between their input (crude oil) and output (gasoline). Similarly, when a natural gas producer decides whether to sell or store gas, they care about the differential in prices between delivery months.
1. Refining Spreads
Below we'll discuss 3 refining spreads: the crack; crush; and spark spreads.
1.1. Crack Spread
Crude oil is refined (cracked) into heating oil and gasoline. We use the term crack because to refine the crude oil it is put into a tall column and heated, which causes the crude oil to separate (crack) into lighter gasoline and heavier heating oil.
NYMEX Crude Oil (ticker CL) contracts are for 1000 barrels.
1.2. Crack Spread Calculator
2. Crack Spread Over Time
library(EIAdata) key <- source("~/eia_key")$value cl1 <- getEIA("PET.RCLC1.D", key=key) rb1 <- getEIA("PET.EER_EPMRR_PE1_Y35NY_DPG.D", key = key) ho1 <- getEIA("PET.EER_EPD2F_PE1_Y35NY_DPG.D", key = key) prices1 <- merge.xts(cl1, rb1, ho1) prices1 <- prices1[complete.cases(prices1), ] crack_bbl_1 <- 42 * (2/3) * prices1$PET.EER_EPMRR_PE1_Y35NY_DPG.D + 42 * (1/3) * prices1$PET.EER_EPD2F_PE1_Y35NY_DPG.D - prices1$PET.RCLC1.D crack_per_1 <- crack_bbl_1 / prices1$PET.RCLC1.D
plot(crack_bbl_1["2019/"])
plot(crack_per_1["2019/"])
library(highcharter) library(htmlwidgets) hc <- hchart(crack_per_1) %>% hc_add_theme(hc_theme_economist()) %>% hc_title(text = "Percent Refining Margin (% Crack Spread) Over Time", margin = 20, align = "left") saveWidget(hc, "crack_per_1_widget.html")
3. Crush Spread
The Crush Spread is the refining margin on Soybeans.
4. Calculating the Crush Spread
Calculation from here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=987507&download=yes
Crush Spread = (Soybean Meal in $ per ton x 100) + (Soybean Oil in $ per 100 lbs. x 600) – (Soybeans in cents per bu. x 50)
5. Crush Spread Calculator
6. Calendar Spreads
- Calendar spreads can hedge storage costs.
7. Locational Spreads
- Locational spreads hedge the cost of transportation from one point to another.