Short Brent/Long WTI: an "obvious" trade?

Thought I'd check back on this thread to see how it was working out.

II notice WTI is still 86 with Brent around 109 so sstill a $23 spread. Will this ever close?

Log

The "Obvious trade" just got interesting once again!

Back out to $19

http://www.reuters.com/article/2012/02/06/us-brent-wti-redux-idUSTRE8151XA20120206

Just watching for now

Nice one mark. Back in to $9.

Was always on the cards.

My problem was much more interesting opportunities elsewhere so this was very much put to one side.

Another relevant development is reported by the FT today. The article concludes:

The Brent-WTI, which has already claimed several victims amid the hedge fund community, could be looking at new casualties.

Good article on this posted by SIR COOP on investorvillage:

www.investorvillage.com/smbd.asp?mb=11837&mn=9694&pt=msg&mid=10862545

The take-home is this: The WTI-Brent price disparity will persist for the foreseeable future, as the only real solution to oversupply at Cushing – the Keystone XL expansion – is still sitting on Hilary Clinton’s desk awaiting approval. She, it turns out, is a bit busy these days, so we don’t expect progress on that front to come quickly. Until capacity develops to move crude from Cushing to the Gulf Coast, Brent will remain the crude price that best reflects supply, demand, and sentiment in the global oil market.

100,000 bopd currently being shipped by rail from Cushing to the gulf ports, could be expected to rise to 300,000 bopd if price differential persists.

http://www.investorvillage.com/smbd.asp?mb=4288&mn=77819&pt=msg&mid=10873890

Another relevant article here in the WSJ for those with a position:

The race is on to build pipelines to relieve a glut of crude oil in the U.S. heartland, but not all of the four plans will make it to the finish line.

It is a competition that is being closely watched in oil markets. The amount of pipeline capacity that eventually comes on line and the pace at which it is built will determine how fast U.S. and European benchmark oil prices will come together again, analysts say.

On Thursday, crude futures on the New York Mercantile Exchange settled at a record $26.49-a-barrel discount to Brent crude, now widely seen as a more accurate indicator of world oil prices.

Must admit with all the bargains about this trade doesn't interest me at all right now.

The spread neary hit $24 early yesterday... but has been declining since then, so I'm back in @ $22.96

Another important FT article for those with this trade on.....it considers scenarios which may lead to the spread widening to $40-50 ....or more!! 

In sum it seems there are plenty of predictions that a production surge is coming that will overwhelm the present capacity to move supplies away from Cushing.

ee

Tried the advanced charts but some Java problem - sounds like it could be the same issue.

Will just have to manage the old-fashioned way.

Left my bets open - will see what happens - really can't see the spread much wider for reasons we discussed before.

Anyway will open more bets if it does move a bit further apart.

B.

...and out again: my stop's been beached, so spread narrowing not confirmed. Back to watching & waiting. Now at $21.22

Hi Marben - is there a way on IG index to chart the difference - I have been doing it manually.

Went short on Brent and long on WTI this morning - at $21 something spread on September contracts.

200pips in profit since.

Still since we had a spread of $15 only a couple of weeks back - will hold on a bit longer.

B

O/T
Now that they seem to have successfully wrecked the comparative charting on the FutureSource website, what are people using to monitor futures please?

Tks.

Interesting read?

http://www.zerohedge.com/article/goldman-presents-three-scenarios-where-wti-brent-headed-and-why-firm-has-been-wrong-directio

(LLS - Light Louisiana Sweet)

Brent’s premium to U.S. crude may widen to at least $40 a barrel between now and the middle of 2012, according to Citigroup Global Markets Inc.

Not got the paper that this quote was sourced from, but the Bloomberg article is here:

http://www.bloomberg.com/news/2011-07-06/crude-oil-rises-as-industry-report-shows-u-s-stockpiles-fall-a-fifth-week.html

$40 spread would be insane though. I can't imagine it would ever get that high, otherwise there will be people carrying the stuff to the gulf coast in Jerry cans. 

Very interesting piece in the FT today re the recent release of oil stocks.

.....points to another, possibly unintended, outcome: a government-created trading opportunity for oil desks at Wall Street banks, commodity merchants and energy companies. Concern is growing that any relief for energy users from high prices may be short-lived.....

....“If you use strategic stocks to try to shape prices, the shelf life of that influence will be limited. It’s a little like a central bank trying to defend an exchange rate,” says Harry Tchilinguirian, head of commodity market strategy at BNP Paribas.....

.....“The release is primarily a way of borrowing oil from the future into the present because the strategic reserves will ultimately be replaced,” Barclays analysts wrote.

 

The print edition version is more illuminating than the online version, though, as it contains a "before and after" comparison of the forward curve which shows that the discount for forward delivery has been compressed by around $2 (not quite sure of the time scale though). This obviously is in line with the idea that the release has simply borrowed from future production.

ee

As foreshadowed in a rather astute FT article (sorry, dont have time to track it down), a few days before the IEA reserves release was announced, the release has had a very short term effect on prices.. Brent is now rebounding strongly (and the spread widening agan as a result), approaching $110/bbl again. Truth is, releasing reserves (without there being an immediate supply crisis) smacks of desperation to try to control the price. But the amount that can be released is limited.

A key point made in the article (or subsequently?) was that it is rather critical/telling whether the release is made in the form of a "loan", that has to be returned to reserves in future months, or whether it's an outright sale. The former approach will simply "kick the can down the road", whereas the latter is highly risky, reducing the developed world buffer against supply shocks.

ISTM that a soaring oil price is positive for producing oilers (if they don't get their profits taxed away) but pretty negative for the global economy.

Appreciated Nigel.

Will take a look. just packing for hols - off to Ottawa to see cousin 7 her fiancee for two weeks..

Hey Nigel.

Where is the best site to follow the daily movements in this Brent / WTi spread trade please. It has piqued my interest.

Cheers.

Hi Nigel. Reading this thread it's never come across as a bread and butter trade.  You opened at about $14, then posted that you'd lost the urge to fight as it shot over $19. I think it peaked about $22.  Are you planning to try this again ?

Closed everything out at a healthy profit - all moved in Soco and Heritage. Oh and a bit of Lloyds.

IAE releases 60m barrels from strategic reserves.

Oil prices coming under pressure as a result.

The announcement comes after OPEC failed to raise production at a meeting on June 8 and despite assurances from OPEC's biggest producer Saudi Arabia that it would lift supplies unilaterally.

"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," the IEA said.

The IEA said it would release 2 million barrels a day (bpd) over 30 days onto the world market to fill the gap in supplies left by the disruption to Libya's output. Libya was exporting about 1.2 million bpd.

Very important FT article today for those with a position. It comments on very heavy bets being made in both directions and summarises the case for further spread widening as follows:

The camp is on the minority at the moment, but its voice is growing. The Keystone XL project is facing notable hurdles, not least the approval of the Environmental Protection Agency. And “Double E” has yet to get enough commitments from physical traders to justify the reversion. Moreover, some oil traders believe that the pipelines would not be enough as onshore oil shale production continues to boom, flooding Cushing with oil in spite of the de-bottlenecking of the new pipelines. Moreover, Brent output is likely to continue falling over the next few years

Profit taken and fully out, for now. Spread appears to be heading back up, short term. Now at over $18.80. Back to watching & waiting.

Wild day.

Was $19 at one point. Back out to $22 again now.

Comes back to my earlierl point - the market is far too complex to make any accurate predictions - just have to play the probabilities that the spread is too wide to be sustainable.

So far so good - nicely in the money on the August contracts.

http://ftalphaville.ft.com/blog/2011/06/15/594576/wgo-whats-going-on-in-brent-wti/

WGO – Whats Going On in Brent-WTI?

Posted by Izabella Kaminska on Jun 15 10:10.

First there was Cushing syndrome. Then there were Brent market antics. Now, nobody knows what’s going on in the Brent-WTI spread...

Well, riding on the big boys coat-tails ;0), the downtrend seems to be established now (with a lower low and lower high formed on the chart), so adding to my position, resetting stop to just above most recent, lower, high. If that high is breached, then the downtrend will appear to be over... but judging by previous trends, it is likely to persist for a few days now. The uptrend lasted a fortnight previously, but the down phases have tended to be sharper and shorter than the up ones (generally 2-4 days).

Why I disagree with ee about the value of this trade in that my losses are limited to ~$1/bbl by the stops but the potential reward (with a good chance of a decline to below $15) is much better. However, trading in this way only works if you spend quite a bit of time watching screens.


Goldman's analysis makes no sense to me, and I suspect they're talking their own book (which, IMO, they usually do - with their pronouncements to the "hoi polloi"). If oil is being exported from the US, that will tighten suppies there, causing the Louisiana price to rise, which eventually will feed back to WTI.

Moreover, as I type, their statement is being contradicted by the market, and the spread is falling quite rapidly (with August Brent off sharply following the contract roll yesterday). It's now more than $2 off the high.

Hellenic Shipping News

Wednesday, 15 June 2011 11:00
The record discount of West Texas Intermediate crude to North Sea Brent is widening because of flows of light, sweet crude to Europe and Asia instead of the U.S. Gulf Coast,Goldman Sachs said in a note.

The growing price gap “has been primarily driven by the weakening of U.S. Gulf Coast light-sweet crude oil prices relative to Brent crude, not a Cushing bottleneck,” Goldman analysts including David Greely said today, referring to the delivery point for the WTI contract in Cushing, Oklahoma.

“The arbitrage between the U.S. Gulf Coast and Europe has flipped, and the market is now directing light-sweet crude oil away from the U.S. Gulf Coast and toward Europe and Asia,” Goldman said.

That caused Brent’s premium to widen in June and reach a record close of $21.80 a barrel yesterday, the bank said. Downside risk for the WTI-Brent spread is “limited” in the near term, Goldman said. The analysts expect the difference to narrow and said they would not make a trading recommendation on it because “the risk associated with the fundamental uncertainty is too high.”

The reversal of the arbitrage was caused by lower prices for Louisiana Light Sweet grade relative to Brent crude, which makes it more attractive for traders to ship top-quality oils to Europe and Asia than the U.S.
WTI crude moved into discount versus North Sea Brent in August amid a glut of stockpiles at Cushing.

Source: Bloomberg

And from PVM, David Hufton, yesterday:

Brent and WTI went their separate ways again yesterday with WTI losing $2 bbl and Brent gaining 7 cts/bbl, taking the arb at the close to -$21.20. The reasons for the huge differential are well rehearsed. Three factors have coincided to create a perfect storm. Firstly, huge and ever increasing volumes of WTI are trapped in the US mid-west where crude from Canada and oil shale production pours in. Secondly, the North Sea loading programme is particularly tight this month because of production problems at the Buzzard field which feeds into Forties. Thirdly, Europe has been deprived of 1.5 mbpd of crude from Libya all of the sweet variety. A change in any one of these elements will impact the WTI/Brent arb. Yesterday we had the added factor of a force majeure declaration by Shell on Bonny Light loadings due to a series of leaks and fires in the Trans-Niger pipeline. Production has been resumed but loading schedules have been disrupted. A corollary of the shortfall in sweet crude and its actual and planned replacement with sour has been a dramatic widening in the Brent/Dubai EFS which we marked at +$8.38 bbl for July and +$7.45 bbl for August at 16.30 London time yesterday(13June).

(If I am in breach of any confidentiality/circulation law, do delete post)

It's easy to construct any old reason for this spread. It's likely to be multi-factorial

In part it is speculative in my opinion and the spread will fluctuate by significant amounts due to random effects.

It's so far from it's normal that it will have a tendency to revert which offers some underlying protection.

And sorry, I don't believe "big boys" can predict the future any better than the next - so I'll play the probabilities thanks.

B.

ps.....bargepole fully deployed on this trade, for the reasons outlined several times above. This is a "big boys game".....and the retail punter is playing poker with a market in which some of the other players have a number of cards up their sleeves.


It's strange isn't it. I completely agree with your comments here but still think I'll make money on it - perhaps deluded - we'll see.

P.S.  Good to see you back posting! ;-)

Per Goldman:

http://www.bloomberg.com/news/2011-06-14/goldman-says-cushing-supplies-not-driving-wti-brent-spread.html

The record discount of West Texas Intermediate crude to North Sea Brent is widening because of flows of light, sweet crude to Europe and Asia instead of the U.S. Gulf Coast, Goldman Sachs said in a note

Yeah, was $22.5 at one point today, now $21.

Back in again as it looks like a bit of a sudden collapse in the spread to well below it's recent low. My stop remains above the recent (record) high, so somewhat broader this time. Hopefully, the fortnight long recent uptrend in the spread is now well and truly over.

Good points.

I think there is some merit in charts for commodities.

But now we have a situation with a ridiculous spread, the forces trying to return it to a more sensible level must be strong. But yes I guess it might worsen in the "short term."

I usually open several small bets with several limits. Random movements of a 100 to 300 points is not so unusual and try to close before rolling into the next contract to avoid extra costs beyond the initial spread.

If I can bank a few hundred pounds a week on that basis it's fine for relatively minimal effort.

Have been doing the same for FTSE shorts hedged against my portie with limits rather than stops to good effect FWIW

Bugs

The questions here must be :

1) who can take advantage of the spread?

2) Are they better to wait for the spread to get even more nuts before "investing"

3) Who is currently losing out/gaining from the spread?

I don't generally use stops because there's a large random element to price movements. Which means that if you use tight stops you end up throwing the dice.

The point IMO is that the price differential is unsustainable and that as it moves away from the mean it's more likely to revert than not.

So I will add to my position.

As you'll see from my post above oil at cushing did actually decline by 1m barrels last week so the speculation is driving the spread not hard facts.

Sorry Nigel, but as a newbie to this potential trade I don't understand your comments, particularly when you are "speculating" that the gap will narrow!

Just because Cushing stocks fell a bit doesn't change the fact that they seem to have an abundance of the stuff whereas we are supposedly missing out on Libya's production and I also read somewhere that pipelines in the north sea are due to close for some reason or another. (Was it to clear mines or routine maintenance?)

Do we have an inventories equivalent number here?

21 bucks and a bit on the cash price at the mo and still watching trying to make sense of it all!

How much does it cost to buy WTI and sell it in Europe? Can it be done physically?

Is this a stupid question? I'm just wondering if there is an upper-limit on the divergence in prices.

In my mind $20 seems like a pretty big incentive.

I've taken a small short on Brent and a long on WTI

B

Supplies of oil at Cushing, Oklahoma, the delivery point for the New York-traded West Texas Intermediate grade, rose to 41.9 million barrels in the week ended April 8, the highest level since at least 2004, when the Energy Department began tracking stockpiles at the hub.

worth noting that's months out of date!


http://af.reuters.com/article/energyOilNews/idAFN0823951820110608

Inventories at the key Cushing, Oklahoma terminal fell 1.02 million
barrels to 38.9 million barrels. Cushing is the delivery point for the New
York Mercantile Exchange's benchmark West Texas Intermediate crude futures
contract.

http://www.bloomberg.com/news/2011-06-10/oil-falls-first-day-in-four-in-new-york-on-signals-economic-growth-to-slow.html

Brent, the European benchmark contract, traded at a record $18.90 premium to U.S. futures today. The spread between the two grades has climbed from $3.29 at the beginning of the year as the Libyan rebellion curbed global supplies of light, sweet crude, or oil with low density and sulfur content.

Equipment problems and planned maintenance are expected to curb production at the Buzzard oil field in the North Sea until the end of July, according to Calgary-based operator Nexen Inc.

“The Libyan disruption has been a major reason for the Brent premium,” Mueller said. “Maintenance at the Buzzard field has both reduced the amount of Brent oil and increased its quality, adding to its price. We also have too much oil at Cushing, depressing the price of WTI.”

Supplies of oil at Cushing, Oklahoma, the delivery point for the New York-traded West Texas Intermediate grade, rose to 41.9 million barrels in the week ended April 8, the highest level since at least 2004, when the Energy Department began tracking stockpiles at the hub.

Amazing, gone over $19 (all time high) and seemigly headed higher.

I've lost the urge to fight it so won't be adding to the position just yet!

Just about to hit $19 spread.

What was the high?

http://www.ft.com/cms/s/0/074c9e26-9133-11e0-9668-00144feab49a.html?ftcamp=rss#axzz1OchQSwsS



The disparity between Brent and WTI has thrown traditional energy hedging strategies into disarray. Delta Air Lines this year said it had shifted most of its WTI hedging positions into Brent and heating oil.



They won't be the only ones to do this.

My guess is at some point the spread is going to deflate quite quickly through speculative positions being built up - given the huge spread and thus cost of hold being about 1$ a month I'm willing wait for that moment.

Fascinating stuff.

Yeah, quite impressive TBH. Added further @ 17.7

I've just entered on the August contracts at a $16 spread.

Some new highs being hit on this arbitrage...

Texas pipeline approved:

http://www.reuters.com/article/2011/04/26/pipeline-enterprise-idUSN2626524920110426

Analysts expect WTI's strong discount to Brent -- which ballooned out to over $17 a barrel in February and currently stands at near $12 -- as well as its discount to crude delivered to the Gulf Coast to last at least until 2013 when new pipelines are online.

Why? There are massive structural reasons why the WTI and Brent contracts cannot be arbitraged in the way that they used to be. The oversupply at Cushing storage is what is creating the spread - so until more storage is built and/or until railroads/pipelines are built to divert supply elsewhere then the spread will remain wide.

This stuff will get built, of course, but if you are taking a position then you should be on top of when that is likely to happen! Perhaps worth following up the items mentioned here?

....but don't bank on being able to make much money - the timescales should be more or less all in the price of the strip.

Simple economics suggest to me that the anomoly cannot continue for more than a few months although I take your points.

Doubled at 15.2 - very surprised there are no inroads on this.

ee's early comment RE: slow movement would appear to have been very poingnant.

Opened up again at 14.4.

For the record I got out at a very small profit last trade.

I'm now out at $12.7 having doubled up at $15. I wanted to exit because I think on Bank Holiday Monday Brent will be closed whilst WTI is trading, and trading on margin I didn't want to be exposed to one side alone for a whole day.

Just what is it with this trade and Thursdays?

I suspect that it is something to do with Wednesdays being the day when US oil stocks figures are published and Fridays being the day of prayer/riot in the ME......

Just what is it with this trade and Thursdays?

I guess it's become a self fulfilling prophecy.

I managed to further increase my position earlier in the week at 15.8 and have closed out that portion now at 14.4.

Still holding plenty and expect further movement inwards.

Interesting, I had wondered if the roll influenced the spread positively for us.

I've now exited again for the time being having hit a virtual stop at $12.5 - looks like the spread is trending higher again for the time being.

Have a good time away, hope it is relaxing!

Cheers, Max

I've reentered the June contracts at $12.7 after seeing a high of $13. I'll have to take a look at CMC - sounds interesting.

Doubled up at $14 (using CMC - they have "cash" commodities - which take note of the contango in the overnight spread rollover - if anyone is wondering!)

Interesting - over the last month or so some of the best exit points have been on Thursdays. Friday prayer days really do seem to affect the spread.

I took my eye off the ball today and got out at $12.50 for a smaller profit :-). Will try to reenter when trend reverses.

Well I'm out again at an average of $12.05, taking a modest profit. The spread has been widening again consistently since late yesterday and my trailing stop has now been hit.

FWIW, for those that trade this via spreadbets, CMC have stated to me that they are likely to offer a synthetic WTI/Brent Spread Instrument shortly.

Whoops, sorry, my spread chart was still comparing against May WTI!!! Having fixed that I've now got a peak on my chart of $13.45 (mids) and I entered at $13.17 (actuals).

Cheers, Max

I've entered the trade on the June contracts at $13.90

Looks like there's money to be made here... but I'm waiting for the spread to start closing in again before entering.

I opened a very small position as a toe in the water. Will look to back it more heavily around $15.

I'm back in - at $12.6 - With the contango effect not being as prevalent as it was before, see :

http://futuresource.quote.com/quotes/quote.action?s=CL

and

http://futuresource.quote.com/quotes/relatedquote.action?symbol=BRN+1K-ICE

It looks good for a couple of $'s once again.

Now $13...

The spread is now $12 again on the May contracts, $11 on June. FT says:

West Texas Intermediate crude is up 0.1 per cent to $108.01, having touched $108.78, its highest mark since September 2008. The widening spread between Brent and the US-based Nymex contracts suggests that worries about curtailed supply, as the fighting in Libya continues, are also affecting prices.

I wonder if it is going to be reentry time soon...

Thanks Mark for the comments. I also exited shortly after my post, at around $9, having opened the position at $12 the previous week. Very nice :-) Sounds like we exited at around the same time.

Not looked at this of late.

I find I usually need something to play with though so for me it's been the USD/YEN play.

Seeing as I mentioned my positions earlier in the day, I'd better state that I've now closed them at a spread of $9.88, for a satisfactory profit. After dipping to a low below $9 earlier today, the spread has been climbing pretty consistently again since then, so my 2hr based downtrend seems over, for now. Back to watching & waiting for the next opportunity.

Hi Max,

Another factor affecting the spread might be the expiry of April WTI contracts. I'm back in, having opened positions on the May-May contracts at spreads of $12.13, $11.85 and $9.85, so rather enjoying this. :0)

Am using the 2 hr chart of spreads to monitor trend changes and using a trailing stop loss based on the previous high (currently set at a spread of $10.20). Working well, so far, but I'll exit when a "higher high" is next formed on the two hour chart.

Cheers,

Mark

I'm still in the trade, and the spread has just dropped off a cliff since 7:45. It's odd, it's WTI that is now moving sharply up whilst brent is flat. There is clearly a lot of concern about Yemen ahead of friday prayers, but this concern would have impacted the brent price more than WTI last week. I'm guessing that the movement in WTI is due to two factors:

* Reduced inventories reported in Cushing
* Yemen and Libya now being reported more prominently in the US, now they are heavily involved militarily

Any other thoughts?

Cheers, Max

My trailing stop of $11.02 was hit this morning, after the spread declined throughout yesterday, so I have taken profits in the above trade. I think this thread has probably run its course, so I won't report further trades here.

Regards,

Mark

Just for the record, the May Brent/May WTI spread peaked @ $12.47 at 16:00 GMT on Friday (on a two hour chart). Since then, it appears to be declining, forming lower lows and lower highs. I re-entered with a slightly larger sized position today @ $11.75, with a virtual stop at the most recent two hour high of $12.07. The spread currently stands at $11.10 - so far, so good! My plan is to follow it down, until lower-lows are no longer formed, or until my stop is hit.

Cheers,

Mark

With these reports, things could get very interesting tomorrow:

Saudi police have opened fire at a rally in the kingdom's east in an apparent escalation of efforts to stop planned protests. Government officials have warned they will take strong action if activists take to the streets after increasing calls for large protests around the oil-rich kingdom to press for democratic reforms.
A witness in the eastern city of Qatif says gunfire and stun grenades were fired at several hundred protesters marching in the city streets Thursday. The witness, speaking on condition of anonymity because he feared government reprisal, said police in the area opened fire. The witness saw at least one protester injured

The spread has blown out from $8 to $12.50 over the last 2 days. Looks like it might be time to jump in again soon if we get beyond $14...

Now at $8!!

Sometimes that patience just needs to stretch some ;-)

Closed all out now.

Hoping we get back to circa $15 again to "play the game" once more.

Sounds like a considered wise decision Mark.

I closed out part of my "doubled up position" today at $12.5 which considering I opened it at $15.75 was quite pleasant.

I'm still satisfied with holding a decent size in the trade with the spread currently at $12.5.

I don't really see any reason to get jittery about the trade and expect world tension to reduce over the next few weeks.

My biggest worry is the contango which effectively wipes out profit over time.

Time for another update...

I have updated the thread header to reflect latest prices. Whilst IG does not yet let me trade the June Brent contract, I observed that the April-May WTI contango was starting to widen again. Given that I only have until 22nd March to roll the April WTI contract and that the contango had been above $3 into the run up to the March-April roll, I decided to roll my WTI contract yesterday @ $1.40.

As can be seen from the figures in the header, after widending in the early part of the week, the spread has narrowed quite sharply. A little while ago the May-May spread had reduced from $13.80 on 2nd March to $10.96. Considering MENA risks over the weekend, I decided that that would be an opportune point to close my trade altogether and am now flat.

Overall, through some fairly cack-handed intraday trading and rolling decisions, I have ended up with only a modest profit overall - so far, despite my original thesis currently proving sound*. I think nigelpm may have done a rather better job. :0) I will review the situation at the start of next week and decide whether to re-enter or not. If the spread opens out and subsequently shows signs of narrowing again on the 2 hourly chart, I probably will re-enter. Otherwise, ISTM that the short-term upside and downside risks are too finely balanced from here, as the spread could easily blow out to $15 again, in the event of further instability in MENA. A recent Barclays note, that a friend has forwarded, focusses on risks in Algeria, which seems a bit under the radar in the popular media at present. My observation is that currently, Brent seems to lead the market with WTI playing catch up when higher Brent prices are sustained. That can offer good trading opportunities.

Cheers,

Mark

*That's why I tend to focus more on fundamental investing than on short-term trading: it suits my mentality better, allowing for a more considered approach. However, I do find that once I become very familiar with certain calculable or predictable behaviours in specific instruments, I am able to trade them profitably. As I've mentioned previously, this relates closely to Andrew Butter's "bubbleomics" hypothesis, where there is a method of calculating an "other than market value" (OMV) for an instrument and trading against short-term divergences from that OMV. However, I would add that I strongly disagree with Andrew's specific approach to calculating the OMV for stock indices... but that's a large topic for a separate article!

Something odd happened at about 12:30 today. After that point, WTI crude has been moving with about 2x the volatility of brent, consistently. The inverted spread chart is tracking the WTI crude price. So, essentially, I am currently 1/2 long WTI.

Has anyone else noticed this? Has the dynamic moved away from brent and onto WTI for some reason? Is it just that USA woke up and they trade with larger pockets, or is something else going on?

Cheers, Max

ICE futures have a special vehicle for trading the spread as a single 'bet'. Saw it mentioned elsewhere a while ago when looking at a Canadian co that was suffering from the disparity.

https://www.theice.com/productguide/ProductDetails.shtml?specId=1242

Up to you to find a way to trade it, though...

I've opened the trade at $15.2 spread. Unfortunately IG won't let me offset the two positions against each other so I have to have full deposit for an independent long + short. Not too unhappy as it stops me leveraging up too much...

I've got the ITFinance Pro charts to display a nice spread chart for me.

It would be nice if my broker allowed me to pair up the legs of the trade into a single line on my P&L account, and allowed me to enter/exit the pair in one go. Does anyone have a platform that will do that?

Cheers, Max

Big jump in Cushing stocks today.... up 1.2mmbbls to 38.6mmbbls

Now back out to $16 - I've doubled up the trade.

Time for an update on this trade...

Since narrowing to a low of around $10 on 22nd Feb (coinciding with March contract expiry), the spread has widened again, as can be seen from the table in the header above. At a 2hr level, the spread also continues to widen and currently stands at around $15.40.

On a short-term view, I remain cautious on this trade but, slightly longer term, continue to remain confident that US oil transportation bottlenecks will be ironed out before too long. A $15 spread is unprecedented and I doubt that it can be sustatined for very long before ways and means are found to physically aribtrage it away. In the short-run, however, it is clear that mid-east supply concerns are impacting Brent pricing more than WTI. This is also apparent in that Brent pricing is currently in slight backwardation, whereas WTI remains in contango to the tune of around $2.

Cheers,

Mark

Well whaddya know, there is a way for the "oil sands gloop" to escape the clutches of Cushing.

PipelineOnRail™ is an economically sound, surprisingly fast way to ship crude oil products within Alberta, to the rest of Canada, the U.S. Midwest, the Gulf coast, and other export markets.

http://www.cn.ca/en/shipping-north-america-alberta-pipeline-on-rail.htm

The point about Brent and Libya seems to be that the Libyan light sweet crude is delivered into Europe....so as the taps are turned off the price of Brent should rise in relative terms

I agree with EE here, if Libya's 1.2m bopd goes off line, the shock will be to Europe who Libya supplies, which could short term send the spread of Brent and WTI much wider.  Though I feel long term once the inititial shock wave is over, and balance restorted, WTI is likely to return the higher again.  The questions is though, when, and high wide will the spread go first?  I note in a recent report 'Reuters market analyst Wang Tao says using technical charts, Brent could be on course for a rise to $158 per barrel in 2011, while he expects U.S. crude to touch $159 per barrel'. (http://www.iii.co.uk/news/?type=reutersnews&articleid=TRE71N1RS&feed=Bus&action=article).  Though just to note, I am not really a fan of using charts, especially at current as the issue are more fundamental than ever, and which direction Libya goes in I feel will dictate the spread of Brent and WTI (Civil war widen, peace narrow).  And hopefully Libya's situation will be resolved shorty, without anymore blood shed, as for too much has been spilled already.

who owns the storage facilities in Cushing?

db

For anyone interested I found the following article to be very interesting on the spread of WTI and Brent:

http://www.theoildrum.com/node/7519?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+theoildrum+%28The+Oil+Drum%29&utm_content=Twitter

OK... header updated. The spread has been reducing very nicely and consistently over the last 3 days, dipping to $9.75 at one point this morning. However, since then it appears to have been widening again. I therefore decided to take profits on the additional trade I opened, at a spread of $10.70. A very satisfactory gain on the opening of $14.53.

I shall now wait until the spread appears to be declining again and then expect to increase my position again, having reconsidered the stop level I will use.

The spread currently stands at $10.91.

Mark

Hi Mark,

Thanks for the reply.

I’m with Victor Chandler Spreads (I’m not sure who they’re a front for).

I made the mistake of longing WTI March and there is still around a $3.70 gap to April and another $1.90 to May on the VC platform.

VC have March closing at 19:30 this evening, I didn’t know different platforms have different expiry times and I didn’t know physical traders were working off a different close.

So I’m looking at a near $15 gap that I opened at $11, I’ll close out today at whatever loss. My WTI is in the money for now so I could roll over and have an $11 gap but with my Brent short already losing lots. My fear then is that the front month WTI will drop off a cliff again and I’ll just be running up bigger losses (hence the thought that perhaps should be doing this the other way round on the May or June, but its all guess work from me and if I did it would be SW1’s law that the gap would close up to about $4).

If we see a $17 gap again, I’ll try and win my money back:- )

Good luck with your trade,

Tony.

I have updated the header with the figures for Friday's close.

Without wishing to count chickens, this trade is currently going better than I could have expected and, right now, the spread has come in to $11.43. The WTI price is showing a lot of strength relative to Brent. :0)

Cheers,

Mark

Hi Mark,

I’m Short Brent April Long WTI March but from an $11 spread, bad timing but could have got out suffering limited damage today.

Now with hindsight of course if I’d taken out my trade with a $15, $17 or $19 etc spread I’d be sitting pretty right now.

Rolling March to April to hold the trade will cost still about £300 per £ and given WTI is 87.4 – 90.4 – 92.8, March, April, May, I think its possible we’re looking at this the wrong way.

Maybe we should be looking at the 3rd month, June Brent May WTI playing the spread widening, currently $10.5 against $15.3 on the front month, if the 3rd month goes out to a crazy spread closer to closing like this month did, swap the trade around.

I’m thinking out loud, asking a question really. What do you think?

I guess it’ll be worth watching what May – May does assuming you roll your Brent April contract you’ll have quite a personal interest.

Tony.

I’ve posted on MF that I’ve gone Short Brent-Long WTI as per this thread from about $11 gap (had a chance to get out not to badly damaged about an hour a go when Brent dived about $2 but has since recovered)

Mar April is currently about $15 was out as high as $19ish
April May is about $12.70
May June is about $10.50

Brent is comparatively flat with WTI front falling 87.4 - 90.4 – 92.6.

Rolling WTI is still about $3 gap with from what I gather reading this thread, every chance that the front month Brent WTI spread just opening up again.

If my take on this is correct is the obvious trade not Long Brent May or June (or some of both) short WTI May?

Tony.

Header updated for 17th March data. The spread now stands at $14.72, i.e. $2.28 away from my stop position and Brent is falling away again. I have therefore increased my position size, as the VAR (value at risk) is within my comfort zone.

ee,

I agree that Mid-east tensions appear to be driving the Brent price more actively than the WTI one - and this is a risk to the trade.

It's work, though, for me and not an obsession. :0)  I don't normally disclose anything about my trading because its mainly confined to a niche where any disclosure could move prices against me. In this area, however, my trades are so microscopic, relative to the market size, that I doubt that anything I say or do would have the slightest influence on prices... so I though it might be interesting to document my thinking/actions - and I've certainly had most useful feedback.

Best,

Mark

Hi Mark,

Interesting charts - even if they are beginning to reveal signs of an obsession ;-)))

One fundamental point to bear in mind will be that the spread is likely to blow wider if tensions rise in the Middle East, because Brent is likely to be a preferred hedge, IMO.  That may be particularly relevant today. Similarly if things calm down then it might move back towards more normal levels.

There's a half-decent blog comment on the spread issue here, which just highlights the likely persistence of storage issues at Cushing.

rgds

ee

Well, it's been an interesting couple of days. :0)

I have updated the table in the header for yesterday's close. On an intraday level, the spread peaked just below $17. Fortunately, it has now pulled back and currently stands at $14.29. That blowout made me think carefully about whether I had chosen the right time to enter this trade, as at the time I entered, the spread was still widening (at least on a daily level).

Trading is a very different operation to investing and it is important to keep the activities separate in ones mind (and when accounting for results). Short term risk/reward comes very much to the fore when trading and disciplined money management is vital to avoid "losing your shirt". That is why I entred this trade in small size to begin with - until I got more feel for the market behaviour, as oil futures trading is not my area of expertise. Successful commodities trading also inevitably involves use of charts.

The article nigelpm referenced in #20 above provides, in turn, a useful link to this article by Seeking Alpha, in support of our trade thesis.

The spread is mean reverting with MRL quite near zero for different time periods. Currently the spread has widened to the level which is two standard deviations below normal and is likely to revert and overshoot on the other side. The statistical probability of this reversion is 95%, and on seven of the last eight occasions, the spread reversed from the extreme level.

Of course, one has to consider that the current spread is a "long tail event". As ee pointed out early in the thread, there is no telling how wide it might go!

The article also includes this useful historical chart of the spread:

- that was on 28th Jan, Yesterday the spread nearly hit -17, way off the bottom of the chart! The odds of a sharp reversal at some point look good, based on history - but when and from what level? This impinges on Andrew Butter's favourite "bubbleomics" topic because AFAIAC what we currently have is a bubble in the spread.

Coming back to the tiiming issue, I decided to study the hourly tick charts for some clues on what the indications were on whether the spread was likely to widen further or not. If it was widening, then it may have been best to close the trade and look for a better re-entry point. Here are recent charts:

Whilst the Brent contract may be peaking, what appears more significant to me is that the WTI contract finally appears to be breaking out upwards after a relatively long downtrend. Are the physical traders finally moving in?

That has tempted me to consider whether I should be increasing the size of my position. My conclusion was that were I to do so I would need to set a (virtual) stop for the spread at $17. If $17 were breached, then that would mean that the spread had not yet peaked and it would be wise to exit the trade and look to re-enter once it started falling more conclusively (or from a higher level, after a peak but with a tigher stop). A $17 spread from the current ~$14 level would mean a maximum loss of $1,500 per mini-contract but a potential reward of $4,500 per contract if the trade is held until the spread reverts to $5. Note from the Seeking Alpha chart above that even a $5 spread in favour of Brent (-5) is unusually high historically. Considering my own money-management I concluded that the amount I had at risk currently was as much as I felt comfortable with (in my trading account). Should the spread widen again - but be showing signs of reversing, such that I could set a tighter stop, then I could add to my position. When the $5 spread level approaches I shall review whether the spread is continuing to close and exit the trade when it is no longer clear that it is, again being guided by the hourly charts.

That is my revised trade plan going forward.

I should emphasise that investing remains my main activity but I do trade a little "on the side". ;0)

Regards,

Mark

Contango in WTI moving in nicely now - down to $2.50 glad I opted to Long the March WTI's over April.

Also, the spread moved in heavily - whether it's a function of this and the upcoming March Expiry or something else I don't know.