In the relatively small world of energy futures and options, there are certain relationships that may be counted on to enhance trading profits. For example, a commodity that is the end-product of a succession of other commodities certainly will have its price influenced by those that precede it in the production process. This may be seen in the price of beef and pork as well as in the cost of gasoline at the pump. The chain-of-command begins in the futures market, in which forecasts of prices shaded by implied volatilities give an advanced view of leaders and followers.
“Crack spread relationships” (below) illustrates several relationships among June 2013 futures contracts for crude oil (WTI), gasoline (reformulated blendstock for oxygenate blending), heating oil and Brent crude oil. After remaining in the background in the last months of 2012, gasoline showed its pricing strength by a rapid gain through mid-February while dragging the other energy futures along with it. From this point through March 28, the energy followers reflect the ups and downs of gasoline’s price variations.
Although a close-fitting pair — heating oil and Brent crude oil — is part of those that are heavily influenced by gasoline price movements, it has a separate life as a crack-spread team. “Crack spread relationships” illustrates this attachment by plotting cumulative percentage price changes for June 2013 futures contracts. The interplay of price variations suggests that the two futures would be a good trading pair.