contracts by 42, then subtract the spot price
for three barrels of /CL. So the formula for
the crack per barrel is 0.33 ( 2*42*
/RB+42*/HO– 3*/CL). Enter that into the
symbol box to see the crack-spread chart.
Why should you care? Because the crack-spread ratio is an approximation of refinery
margins, it can act as a proxy for the energy
sector’s health and even the economy as a
whole. Refiners are natural sellers of the
crack spread—they buy crude oil and sell
refined products—so a weakening crack
spread can pressure oil refiners. For example, if there’s a disruption in the oil supply, it
might weaken the crack. So might a slowing
of economic growth. Seasonal trends, such
as winter heating and summer travel, might
strengthen the crack. So could a strengthening U.S. dollar, because it tends to weigh
down crude oil prices.
GET A LOAD OF BEANS ’N CORN
Like the proverbial beef-versus-chicken
substitution curve from Econ 101, the soybean/corn ratio compares two somewhat
interchangeable products. Think of it as the
relative yield per acre of each crop, less the
difference in production, marketing, and
distribution costs. Corn yields about three
times the number of bushels per acre, but it’s
more expensive to grow, haul, and process.
Stock traders know
price is a function of
some internal, some ex-
ternal. Whether you’re
a stock picker, scalper,
But what about futures? How do you
track the fundamentals? There’s no price-
to-earnings ratio on a barrel of crude oil.
Turns out, futures traders use a whole
host of fundamental ratios to assess everything from short-term arbitrage opportunities to changes in long-term macro trends.
Whether it’s crude, gold, bonds, or beans,
you can watch a unique set of factors in
each asset class. Even if you aren’t actively
trading the futures markets, some of these
ratios are still worth a look as secondary
indicators that can offer insight into stocks,
stock sectors, and the market as a whole.
CRACKING THE CRUDE CODE
Energy traders keep a keen eye on the crack
spread—the difference in price between
crude oil and the products derived from
crude, such as gasoline, heating oil, diesel,
and other distillates. Futures markets have
their own version of the crack spread. The
exchanges have designed contracts and
contract sizes to roughly correspond.
One popular crack-spread ratio is 3:2:1—a
spread of three contracts of crude oil (/CL)
against two contracts of gasoline (/RB) and
one contract of heating oil (/HO). The
NYMEX heating oil contract serves as a
benchmark for heating oil and ultra-low
sulphur diesel fuel. Both terms are used
interchangeably. Whatever you call it, a
crack-spread ratio of 3:2:1 (or 5:3: 2, 1:1, or
whichever you choose) serves its purpose.
Want to price it on the thinkorswim® platform from TD Ameritrade? See Figure 1.
Sorry for the math, but here goes. A /CL
contract is 1,000 barrels; /RB and /HO contracts are 42,000 gallons; and there are 42
gallons in a barrel. To get the spread price in
dollars, multiply the price of /RB and /HO
FIGURE 1: Track the crack. From the Charts tab, enter the crack-spread formula to plot the chart.
Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
At the beginning of each growing season,
farmers decide what to plant. In the nation’s
midsection, that typically means choosing
between corn and soybeans. Once the crop
is in the ground, there’s no turning back. In
some years, the two crops move in tandem.
In other years, growing conditions and demand dynamics can favor one or the other.
How do you plot a futures ratio on the
thinkorswim platform, considering futures
symbols include the “/” signifier, which
doubles as a division sign? There’s a work-around: a lower study called PairRatio.
To pull it up, under the Charts tab, go to
Studies > Add Study/Quick Study >
Lower Studies (Other) > PairRatio. In
the chart box, type /ZS+/ZC. The ratio will
appear in the lower section of the chart.
To see just the ratio and not the sum of the
two products in the upper half, go to Style >
Settings and clear the Show price subgraph
checkbox (see Figure 2).
The soybean/corn ratio compares bushels of soybean and corn values. Over the
long term, the point of indifference has
been about 2. 3.
Why should you care? Tracking the soybean/corn ratio can offer clues about the
state of the energy market, trade policy, and
the macroeconomic environment generally.
In addition to their function as animal feed,