Commodity Traders are Wicked Smart.

Take a behind-the-scenes look into what drives billions on energy trading desks.

In just 1 century, the commodities trading market has transformed into a nearly $100 billion industry, delivering record profits on an annual basis. But more interesting than the size of the market is the sophisticated techniques deployed by some of the largest and smartest commodity trading shops.

There’s no better example of this ingenuity than: The “Crack” Spread.

Background — Crack? That sounds weird.

The name of this may be a bit off-putting (if you’re from the U.S.) and maybe laughable, but I assure you, this is something else.

The crack spread refers to the pricing difference between a barrel of crude oil and the petroleum products refined from it. The “crack” being referred to is an industry term for breaking apart crude oil into the component products, including gases like propane, heating fuel, gasoline, light distillates, like jet fuel, intermediate distillates, like diesel fuel, and heavy distillates, like grease.

The reason for tracking this spread between crude oil and crude-derived products, is that it is a major factor in the profitability of the refining companies.

The job of a petroleum refining company is to buy the raw crude oil, process it, then sell the processed products (diesel, jet fuel, etc.) for a profit. However, despite the products being derived from crude oil, the prices of the products don’t always move in tandem with the price of the underlying crude oil.

This leads to an extremely precarious position where if crude prices rose, but say, the price of diesel didn’t; the refiner has to pay higher prices for the raw crude oil, but they would have to sell the diesel for a loss since it didn’t also rise.