WTI Crude Spreads Going Wild
Kevin Davitt | Nov 22, 2013 02:43AM ET
The Brent v. WTI spread has blasted out again on US production, Iran, etc....
It's hot money that moves this spread around (my opinion).
The fundamental story is wonderful, but the WTI has a lower sulfur content which makes it easier to refine than Brent and generally more valuable, but the market right now disagrees and that's all that matters.
Picking the tick on the futures spread is dangerous business and not for the faint of heart. If you're right and negotiations with Iran make some progress.....WTI should outperform Brent at some point before long.
That's one approach.
Alternatively, I could consider options strategies that look for the spread to narrow over the next 3 months. I'm looking at March options in Brent and WTI that expire in the middle of February. WTI options expire on Feb 14th Brent options expire on Feb 10th Consider:
- BUYING the WTI 105 call around 48 cents verses.....
- SELLING the BRENT 122 call for 48 cents (EVEN MONEY on the options).
- You're synthetically short the spread at $17 wide but not as "futures sensitive".
The March Brent v. WTI spread is 14.80 wide as I type.
In Spring of 2011 (Arab Spring = FEAR and inflation) as well as early 2012 (Iran) Brent traded up near $125. (At the same time WTI ~$115).
There is CONSIDERABLE risk in ANY OPTIONS SPREAD. Perhaps Brent v. WTI goes back to $20-$25+ wide. I doubt it, but it's possible.
We can discuss various alternatives if this is of interest. Perhaps it makes sense to wait a couple days, but I believe we're VERY close to a potential pivot. If the front month spread (now at $16.20 wide) gets out to $17.50-$19.00 wide again I would consider short term scalping futures (short Brent. long WTI).
At one point in mid July of this year the spread (front month) literally went RIGHT TO 0.00 (EVEN) and then reversed in perfectly algorithmic insanity.
Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.