Profiting from Potential Narrowing of Brent/WTI Spread
If you think the prices of Brent/WT are going to converge due to events in the Middle East that affect Brent but not WTI but are less certain about the overall demand outlook for oil, how would you express this in a trade? I imagine it would be some way of going long Brent/short WTI to hedge out the influence of general demand for crude, but how exactly would/could you express this through oil futures?
This is my bread and butter. However, as an individual I doubt you have access to both ICE and Globex -do you?
Isn't the Brent trading above the WTI, and if you thought those prices would converge wouldn't you be short Brent / long WTI?
This.
Brent is a much higher quality crude and it should continue to trade at the spread imo. Only if the spread gets really wide based on the historic relationship should you even consider this play. The spread right now is about $9 ( $110.50 - $101.50) and that's right imo.
If you want to learn about crude in general this is by far the best book: http://www.amazon.com/Oil-101-Morgan-Downey/dp/0982039204/ref=sr_1_4?s=…
The real danger with trading commodities, especially oil, is that industry insiders know what is going on far more than you ever will. You have to respect the market price because the big players would exploit this spread if they thought it was inaccurate.
As one one of the above posters mentioned you'd have to access both products... ICE, CME Globex, etc:
I'm looking at Interactive brokers and they give access to Ice futures. Their ticker for Brent is COIL. WTI is WTI. The strange part is that the prices are different on the ICE exchange and Interactive Brokers (which using IPE exchange) so obviously the contract is different.
Wrong... WTI has higher quality than Brent and has historically traded at a premium. I've known this trade for a year now. finally they reversed the pipeline. It's about time. You don't need access to both Globex and ICE. I am pretty sure Globex offers Financial Brent.
Opps apologize about the crude quality mix-up... should've done my due diligence, especially considering my Oil 101 reference book. I assumed the premium was because of the quality but that's not the case so it must be the pipeline issue.
The contract sizes are different. Not familiar with Interactive Brokers and the quotes. I use WebICE when I'm not at the office.
Man I would love to trade commodities
Gekko is right. WTI > Brent quality. WTI usually trades above brent but I would say the historical range is +3/-5 bucks. Its trading 9 bucks in favor of Brent which is nothing where it was 2 months ago at 26 bucks. If anything it should widen out before it narrows back to historical average.
There are a number of trades you can make given this without actually trading this spread. The most common trade is brent ti swaps which common investors do not have access to.
OP, How much capital do you have? Are you able to open a margin futures trading account?
I work at a midstream OG company. The major reason for the spread is indeed the glut at Cushing, OK. To narrow the spread, you will need a pipeline solution out of the Gulf. Seaway reversal has been announced (Conoco/Enbridge) and that's part of the reason the spread has narrowed. Keystone XL is still in the works, but probably gets worse as time goes on. Committed shippers have the right to walk by end of year, and will likely re-negotiate lower PL tariffs for the increased risk of still being committed. Other companies are jumping at the bit to reverse pipelines and get some infrastructure in place.
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