WTI Brent Spread Widening
Hi, being following the crude market for awhile now. Can anyone explain how come the Brent and WTI Spread has continued to widen over the past 2 - 3 months? Granted US found Shale, but that still does not account for the widening spread since
EIA suspect that the shale formation may add only about 0.5 Mb/d by 2014, hence its not a enormous amount for the current market which produces over 80 mb/d
Europe's Macro conditions is worse than NA, hence there should be relatively stronger downward pressure on the Brent, which would drive the spread to narrow.
By the way how is Brent more expensive than WTI? EU as a whole does not consume more than NA and the API is lower on the Brent.
http://www.ft.com/intl/cms/s/0/64406462-115e-11e2-a637-00144feabdc0.htm…
US supplies are reaching record levels and tensions in the ME put more upward pressure on Brent (for geographic reasons, a closer substitute).
It's been a while since I traded WTI-BRN, but does the spread still narrow down considerably (to 20-30c by Z2017). Blame the Marcellus shale, Moammar Gaddafi and Bashar Al-Assad.
double post
Good observation, I was using this as a reason for why refiners (PSX, VLO, TSO, MRO) are rallying, since they export gasoline to Europe. My rationale is that tensions in the Middle East affects Europe more than it affects NA since we always have the gulf, which explains the widening spread.
Might want to check out the Brent - LLS spread too.
The U.S. has export regulations that prohibits the export of domestically produced crude, as well as restrictions on how refined products can be exported. As a result of this, the price of Brent crude is much more susceptible to supply side shocks that we've seen this year (Middle East/Sudan), whereas the WTI price will be more affected by the (excess) domestic supply.
monkeyspells has this down. the other reasons are kind of BS. Bottom line is that the US has TONS of WTI reserves and oversupply has lowered the price.
WTI Crude Spread (Originally Posted: 02/20/2011)
Any idea why the spread between March/April WTI crude contracts blew up around December and has only recently come down a little? Historical spread is only around 50 bps.
A lot of reasons... nothing is really normal recently in crude. Do your research, read the DoE report, compare the historical stock level of crude and products to the current level. People below me will probably tell you it's because of storage in Cushing is high (very close to 38), so the cost of carry is high (bidding for storage), therefore the spread is high... Thats the conventional wisdom. You need to account for other factors, maintenance season, gasoline blending season, current demand ( US census, the proportion spent at the pump for every dollar spent in US ) etc... The same time you look at crack spreads, some of shit just doesn't make much sense fundamentally... Anyway, look it up...
for the rooks, can you explain what the "spread" is?
thanks.
@ibintx: spread = difference between price for the april and march contracts. the term is used in a lot of similar situations, i.e spread between 10 and 30 year treasury yields
Yah, from what I read in Gartman the Cushing delivery point is near capacity. This is why the spread between these contracts is so high (it is also why Brent is trading at an enormous premium to WTI, usually WTI trades at a slight premium since it is better quality)
haha, yeah, it's true. But that doesn't justify the inter market spread. The spread is blown up so much, WTI is trading at a discount of $16.53/bbl. If I was Trafigura, Vitol or Glencore, I am gonna enter into future contracts at ICE and massive inter-market spreads (high leverage, since low risk) or simply long WTI future swap and short Brent future swap. Buy March WTI future, take delivery at Cushing or some other hub whichever is cheaper (hedge basis risks using basis swap). Then use commercial crude oil supertanker, to make delivery for those ICE futures. The freight rate these day is cheap as dog shit, probably 1 dollar/ bbl (thats including insurance)... They can crush that spread, ripping huge profit from those spreads or future swaps.... I have no idea why this is not going on right now... This is widest spread in HISTORY!!! Now don't even get me started with gasoline crack or heating oil crack.
Maybe, just maybe another Brian Hunter or Yasuo Hamanaka is holding the market up for ransom.
p.s. I believe CLEBZ is the ticker at NYMEX GLOBEX for inter commodity spread WTI vs Brent
-$15.17 now, narrowed $1.36. news: unrest in Tripoli, BP suspended its operation there... Libya is not a big exporter to US, so it probably has more impact to Brent... Spread continue to widen a bit? lol, in any case, I am thinking about trading some pieces of spread soon.
where do you get your markets man gekko. apr wti/brt last done around -11.
i'm glad you're not glencore/trafi cos you would have lost lots of money for them.
WTi is a landlocked crude which cannot be exported. The LLS/WTI spread is like +18 off last print - which means crude in the US is not as cheap as you think it is. it is due to logistics issues that WTI at Cushing prices are depressed.
I compared the front month to measure trans-Atlantic spread. March WTI is still in play. And from when I posted, it was awhile ago, the market jumped over 4% overnight, if you realized. While I do realize the capacity shortage in Cushing, I didn't know WTI cannot be exported. Forgive me ignorance. Maybe try export crude from the biggest exporter for US market, Canada or try West Africa (I heard 2 weeks ago, west African crude was trading at a discount over 8 dollars to Brent, and Nigerian crude should be better quality than North Sea). And like you said, LLS/WTI spread was about 21 last week. even Poseidon and Mars was trading at a premium. WTI is cheap... I think you missed my point. I am not saying I am capable of doing arbitrage in this market, since as a college student, I obviously don't have to resource and information to capture arbitrage opportunities in the market, like Trafigura or Glencore. I was just saying there is a mean reversion trade. When is it going to converge? I have no clue but I am waiting for the turns.
Anyway, no hard feelings.
Cheers
Mean reversion is a tricky assumption. What if the market has fundamentally changed and mean reversion will not occur? Or what if it does occur, but it takes you (and all others involved in the position) out long before the eventual reversion?
A similar logic was applied a few years ago with Crude/Natty ratio, and tons of traders lost everything waiting for eventual mean reversion for this ratio.
why is contango in oil such a shock to some of you? We have seen this in 2008,2009, some parts of last year.
The Brent-WTI spread is a new thing. But general contango from 1 or 2 months out happens when the market breaks and it breaks often.
.
@LIBOR I totally agree with you. Being right and making money can be completely different thing. Your example of oil and gas ratio is very much appreciated. That's what I am trying to watch out for. But for now, the basic supply/demand picture hasn't changed much. Like many said here, the contango blew up because of Cushing. Since last time, I think discount of march to July or August is over 10 points. And if you look at the whole term structure it converges fairly quickly. While in case of Oil/Natty ratio, the supply and demand changed (shifted towards LNG and then development of shale gas) @ pillz Domestic crude is still cheap. A strong arbitrage market tends to support cash sweets like LLS, cuz, as you taught me, Gulf is not landlocked, therefore arbitrage the tran-Atlantic spread can happen, pushing LLS and Brent to converge. If the spread is wide enough, I am sure they can reverse the pipeline toward Cushing (according to a friend of mine, this is possible)
Ea corrupti neque et illum sed. Dolor rerum est pariatur tenetur. Aspernatur molestiae fugiat cumque et.
Autem non voluptatum id. Alias aut aliquid alias quibusdam laborum illo. Ab maxime assumenda sed at tenetur error voluptas. Harum dicta corporis ratione quod. Eos molestiae aut ex minima reprehenderit aspernatur.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Modi ad et aperiam iusto. Officiis tenetur qui sit.
Voluptatem corrupti iusto repellat dignissimos aut et nostrum unde. Assumenda necessitatibus sed quo iste. Saepe ut at totam. Nulla magnam ut explicabo qui et vel. Officia saepe incidunt cumque officiis id fuga. Quaerat modi eius culpa dicta tempora ut eaque. Dignissimos sed officia ad molestiae eveniet.
Optio non sunt maxime dolores harum deserunt. Perferendis quis et iusto voluptas numquam quo quia. Ut molestias ratione quam explicabo velit.