What Is an Inter-Commodity Spread? A Plain-English Guide for Commodity Markets

Inter-commodity spread defined An inter-commodity spread is a market position that is simultaneously long (buying) one commodity and short (selling) a different but related commodity. The goal is not to bet on whether prices rise or fall — it is to capture or protect the price relationship between the two. Physical processors such as oil refineries and soybean crushers use these spreads to lock in their processing margins months before they run their plants.

Table of Contents

1. What Makes Two Commodities “Related”?
2. Inter-Commodity vs Intra-Commodity Spread
3. The Crack Spread: Oil Refiners’ Core Hedge
4. The 3-2-1 Crack Spread Formula
5. The Crush Spread: Soybean Processors’ Hedge
6. The Spark Spread: Natural Gas vs Electricity
7. How Physical Processors Use Spreads in Practice
8. Frequently Asked Questions
9. Key Takeaways

What Makes Two Commodities “Related”?

Two commodities are “related” when there is a real-world economic link between them — usually because one is made from the other, or because they compete for the same end use.

The classic examples:

• Crude oil and gasoline. Refineries buy crude and sell gasoline. The price of gasoline depends partly on crude costs.
• Soybeans and soybean meal. Crushing plants grind soybeans to produce meal (a protein feed ingredient) and oil (a cooking and fuel ingredient). The output prices depend on the input cost.
• Natural gas and electricity. Gas-fired power plants burn natural gas to generate electricity. A higher gas price means a higher cost of producing power.

In each case, the spread — the difference in price between the two — represents a real economic margin. It is not abstract. It is the profit (or loss) a physical processor earns by doing their job.

This is why inter-commodity spreads matter to supply chain and commodity professionals, not just financial traders. A refinery, a grain crusher, or an electricity generator can use these spreads to protect their margins months in advance. They are hedging tools first, speculative instruments second.

Inter-Commodity vs Intra-Commodity Spread

Before going further, it helps to understand what an inter-commodity spread is not.

An intra-commodity spread — also called a calendar spread — involves the same commodity at two different delivery dates. For example: buying December corn futures and selling March corn futures. Both legs are corn. The trader is betting on whether the price difference between December and March will widen or narrow. Storage costs, seasonal demand, and harvest timing drive this spread.

An inter-commodity spread involves two different commodities. A real economic link connects them — input to output, or competing end uses.

Feature	Intra-Commodity Spread	Inter-Commodity Spread
Commodities involved	One (different dates)	Two different commodities
What it tracks	Time and storage premium	Processing margin or demand relationship
Example	Dec corn vs Mar corn	Crude oil vs gasoline
Primary users	Speculators, commercial storage operators	Refiners, crushers, power generators

Understanding this distinction matters because the risk profiles are completely different. A calendar spread mostly responds to storage conditions and seasonal harvest pressure. An inter-commodity spread responds to processing economics — production costs, output prices, energy policy, and seasonal demand all at once. A soybean crusher and a corn merchandiser face entirely different spread risks even though both trade corn and soybeans.

The Crack Spread: Oil Refiners’ Core Hedge

The crack spread is the most widely traded inter-commodity spread. It represents the profit margin a refinery earns by “cracking” (refining) crude oil into petroleum products — primarily gasoline, diesel, and jet fuel.

The name comes from the refining process itself. Crude oil is thermally “cracked” — broken down by heat and catalysts — into lighter, more valuable products. The spread between what you paid for crude and what you sell the products for is your gross margin.

A refinery’s core economics are straightforward: buy crude oil, sell petroleum products. The crack spread is the difference between what the refinery receives for its products and what it paid for crude.

If WTI crude is at $80 per barrel and RBOB gasoline (a standard gasoline blending component traded on NYMEX) futures are at $2.80 per gallon — which equals about $117.60 per barrel — the gasoline crack spread alone is roughly $37.60 per barrel. That is gross margin before operating costs.

Crack spreads are published daily. When you hear that “refinery margins are strong,” it usually means crack spreads have widened — petroleum product prices have risen faster than crude costs. When crude spikes and product prices lag, crack spreads compress, squeezing refinery profitability. During 2022 following Russia’s invasion of Ukraine, diesel crack spreads in Europe exceeded $60 per barrel — a level almost never seen before — because European refiners scrambled to replace Russian product supplies.

US refineries hedge their crack spread risk by selling gasoline and heating oil futures on NYMEX while buying crude oil futures. This locks in a processing margin regardless of where absolute prices go.

The 3-2-1 Crack Spread Formula

The 3-2-1 crack spread is a simplified but widely used formula that approximates the typical output ratio of a mid-complexity US refinery.

The formula: 3 barrels of crude oil → 2 barrels of gasoline + 1 barrel of distillate (heating oil or diesel).

This ratio reflects how a typical US Gulf Coast or Midcontinent refinery splits crude oil into products. Real refineries are more complex — they also produce jet fuel, asphalt, propane, and lubricating oils — but the 3-2-1 captures the dominant economics.

How to calculate the 3-2-1 crack spread:

1. Take the price of 2 barrels of RBOB gasoline (futures price per gallon × 42 gallons × 2)
2. Add the price of 1 barrel of heating oil (futures price per gallon × 42 gallons × 1)
3. Subtract the price of 3 barrels of WTI crude oil
4. Divide by 3 (to express the spread per barrel of crude)

Example using approximate market prices:

• RBOB gasoline: $2.80/gallon × 42 gallons = $117.60/barrel × 2 barrels = $235.20
• Heating oil: $3.00/gallon × 42 gallons = $126.00/barrel × 1 barrel = $126.00
• WTI crude oil: $80.00/barrel × 3 barrels = $240.00
• 3-2-1 crack spread = ($235.20 + $126.00 − $240.00) ÷ 3 = $40.40 per barrel

A $40 crack spread means the refinery earns roughly $40 of gross margin per barrel of crude processed, before operating costs (energy, labour, maintenance, overhead). Typical variable cash costs for a complex US refinery run $8–14 per barrel, so a $40 crack spread represents a healthy profit.

When this spread drops below $10–15 per barrel, refineries start losing money on variable costs and may reduce throughput. When it spikes above $50 (as happened in mid-2022), refineries operate flat-out and profits surge — triggering calls from governments for “windfall taxes” on refining profits.

You will also encounter the 5-3-2 crack spread — 5 barrels of crude → 3 barrels of gasoline + 2 barrels of distillate — which better reflects refineries running higher distillate production. And the 2-1-1 crack spread, which is simpler (2 crude → 1 gasoline + 1 heating oil). Each is a different approximation of the same underlying economics.

The Crush Spread: Soybean Processors’ Hedge

The crush spread does for soybean processors what the crack spread does for refineries. It measures the gross margin earned by crushing soybeans into meal and oil.

A soybean crusher — companies like Bunge, ADM, Cargill, or Louis Dreyfus operate the largest crushing facilities — buys raw soybeans, runs them through a solvent extraction process, and sells two outputs:

1. Soybean meal — the protein-rich solid remaining after oil extraction, used primarily in livestock and poultry feed.
2. Soybean oil — the fat used in cooking oil, food processing, and increasingly in biodiesel.

The crush spread is: Value of meal + Value of oil − Cost of soybeans = Gross crush margin

On the Chicago Board of Trade (CBOT), the standard conversion formula is:

• 1 bushel of soybeans (56 lbs) yields approximately 44 lbs of meal + 11 lbs of oil (with some processing loss)

This calculation is called the “Board crush” and it is published daily.

Example calculation:

• Soybeans: $10.00/bushel
• Soybean meal: $300/short ton → (44 lbs ÷ 2,000 lbs/ton) × $300 = $6.60 per bushel equivalent
• Soybean oil: $0.50/lb → 11 lbs × $0.50 = $5.50 per bushel equivalent
• Crush spread = $6.60 + $5.50 − $10.00 = $2.10 per bushel

This $2.10 is the gross margin. Net margin after processing costs (energy, chemicals, labour) typically runs $0.50–$1.50 per bushel in a normal market.

A crusher watching this spread go negative — perhaps because soybean prices spike on a South American drought while meal and oil prices lag — knows their margin is disappearing. They will hedge by selling meal and oil futures forward while keeping their soybean purchasing flat, locking in the spread while it is still profitable.

Brazil and Argentina are the world’s dominant soybean crushers as well as growers. Argentina in particular exports predominantly processed meal and oil rather than whole beans — making its crushing industry central to global soybean meal supply. A crush spread analysis that ignores Argentina’s policy environment (export taxes on raw soybeans vs. processed meal) is missing a critical input.

The Spark Spread: Natural Gas vs Electricity

The spark spread is the power generation equivalent of the crack spread.

It measures the profit margin a gas-fired power plant earns by converting natural gas (the input fuel) into electricity (the output sold to the grid).

Spark spread = Electricity price − (Natural gas price × Heat rate)

The heat rate — measured in MMBtu of gas consumed per MWh of electricity produced — captures how efficiently the plant converts fuel to power. A modern combined-cycle gas turbine (CCGT) achieves around 6.5–7.5 MMBtu/MWh. An older, less efficient simple-cycle gas turbine might run at 10–12 MMBtu/MWh.

Example calculation:

• Natural gas: $3.00/MMBtu
• Heat rate: 7 MMBtu/MWh
• Fuel cost: $3.00 × 7 = $21.00/MWh
• Electricity price (day-ahead power): $35.00/MWh
• Spark spread = $35.00 − $21.00 = $14.00/MWh

A negative spark spread means a gas plant would lose money running at current prices, so plant operators reduce output or shut down entirely. This is called being “out of the money” — the plant’s fuel cost exceeds the power price it can earn.

The dark spread is the coal-fired equivalent — coal price divided by the plant’s heat rate versus the electricity price. In Europe, where carbon pricing exists under the EU Emissions Trading System (ETS), generators calculate the clean spark spread and clean dark spread — which subtract the cost of carbon allowances to reflect the full compliance cost of running each fuel type.

How Physical Processors Use Spreads in Practice

Financial traders use inter-commodity spreads to speculate on changing relationships. Physical commodity processors use them differently: as operational hedging tools to lock in real margins from real production, often months in advance.

A soybean crusher’s approach — step by step:

1. In July, the crusher monitors the forward CBOT crush spread — the difference between November soybean futures and December meal/oil futures.
2. The forward crush spread is running at $1.80/bushel — profitable after processing costs of $0.90.
3. The crusher contracts to buy 5 million bushels of soybeans from local farmers for November delivery.
4. Simultaneously, the crusher sells December CBOT soybean meal and oil futures in the proportions that match their expected production.
5. Come November, the crusher takes delivery of soybeans, processes them, and sells meal and oil to feed mills and food manufacturers. They close the futures positions.
6. The result: the crusher captured the $1.80 spread they saw in July, regardless of how prices moved between July and November.

A US Gulf Coast refinery’s approach:

• The refinery contracts to receive a VLCC (Very Large Crude Carrier) carrying 2 million barrels of WTI-equivalent crude arriving in 45 days.
• Simultaneously, it sells NYMEX RBOB gasoline and heating oil futures for delivery in 45–60 days.
• When crude arrives, it is refined over the following three weeks, and the products are sold into the spot market. The futures hedge offsets any adverse price movements.
• The refinery has locked in the crack spread it saw when it bought the crude cargo.

Neither the crusher nor the refinery is “speculating” on spread direction the way a hedge fund would. They are using the spread as insurance on their operating margin. The hedge allows them to plan production, commit to supply contracts, and manage cash flow without being fully exposed to commodity price volatility.

This is the physical trade angle that most financial descriptions of inter-commodity spreads overlook entirely. For a shipping coordinator or logistics professional, understanding that a refinery’s purchasing decisions — how much crude to buy, when, at what quality — are partly driven by where the crack spread is trading gives context to why cargo volumes and freight demand fluctuate the way they do.

Frequently Asked Questions

What is the difference between a crack spread and a crush spread?

Both are inter-commodity spreads measuring a processing margin, but in different industries. The crack spread measures the margin for refining crude oil into petroleum products (gasoline, diesel, jet fuel). The crush spread measures the margin for crushing soybeans — or other oilseeds — into meal and oil. The underlying mechanics are identical: combined output value minus input cost equals gross processing margin.

Why does the 3-2-1 crack spread use those specific numbers?

The 3-2-1 ratio approximates the typical output from a complex US refinery. For every 3 barrels of crude processed, a refinery typically yields about 2 barrels of gasoline and 1 barrel of distillate (heating oil or diesel). The ratio simplifies a complex industrial process into a tradeable benchmark that reflects real refinery economics. Different refineries use 5-3-2 or 2-1-1 ratios depending on their configuration.

Can a processor keep running when the spread is negative?

Usually not indefinitely, but short-term it depends on fixed costs. A refinery or crusher must pay for fixed overhead (debt, staff, maintenance) whether or not they process anything. If the spread is slightly negative but the variable cost of shutting down and restarting is high, they may run for a period at a loss on variable costs. If the spread is severely negative, they reduce throughput or idle equipment. Prolonged negative spreads force permanent closures.

Who actually trades inter-commodity spreads beyond physical processors?

Two main groups. First, physical commodity processors — refineries, grain crushers, power generators — who hedge real margins. Second, financial traders (commodity hedge funds, trading advisors) who speculate on whether the spread will widen or narrow based on supply and demand analysis. Financial traders frequently take the other side of a processor’s hedge, which is one reason exchange-traded crack and crush spreads are liquid enough to be useful.

How are crack spreads affected by seasonal demand?

Significantly. US gasoline crack spreads typically widen in spring as refineries switch to summer-grade gasoline blends and driving demand increases. Heating oil crack spreads (diesel and distillate) widen in autumn ahead of winter heating season. Refineries plan their maintenance turnarounds partly around these seasonal spread patterns — scheduling downtime during low-margin periods.

Is the spark spread the same as the electricity price?

No. The spark spread is the margin a gas-fired power plant earns — electricity price minus the fuel cost to generate that electricity. The electricity price is one input to the calculation. A high electricity price does not necessarily mean a high spark spread if gas prices have risen by the same amount. The spread could be the same or even narrower.

What is the “frac spread” in oil and gas?

The frac spread — short for fractionation spread — measures the value of separating natural gas liquids (NGLs) from a natural gas stream. It compares the revenue from selling NGLs individually (ethane, propane, butane) against the alternative of leaving them in the gas stream and selling them as fuel. When NGL prices are high relative to natural gas, the frac spread widens and processors extract more NGLs. This is a third major category of inter-commodity spread in energy markets.

Key Takeaways

• An inter-commodity spread is a position simultaneously long one commodity and short a related commodity — it tracks the price relationship between them, not their absolute levels.
• The crack spread measures a refinery’s gross processing margin: the combined value of petroleum products (gasoline, heating oil) minus the cost of crude oil input.
• The 3-2-1 crack spread formula — 3 barrels of crude → 2 barrels of gasoline + 1 barrel of distillate — is the standard US refinery margin benchmark and is quoted daily in the market.
• The crush spread measures a soybean crusher’s gross margin: the value of meal and oil outputs minus the cost of soybean input, expressed per bushel of soybeans processed.
• The spark spread measures a gas-fired power plant’s margin: electricity price minus the natural gas fuel cost adjusted for the plant’s generation efficiency (heat rate).
• Physical processors — refineries, grain crushers, power generators — use inter-commodity spreads as hedging tools to lock in processing margins in advance, not as speculative trades.
• Inter-commodity spreads differ from intra-commodity (calendar) spreads: the former involves two different commodities linked by processing economics; the latter involves the same commodity at two different delivery dates.
• For trade and logistics professionals, monitoring crack and crush spread direction helps explain why processor purchasing volumes and cargo freight demand fluctuate over the course of a year.

Related Reading

To deepen your understanding of the topics covered in this article, explore these related guides: the term structures that traders compare across related markets, the exchange venues where these relative-value positions are executed, one of the most traded inter-commodity relationships in energy markets and the supply-demand work that identifies when spreads are mispriced.