Wednesday, January 12, 2011

Oil: On the implications of a widening WTI-Brent spread

Brent is trading at $98.00 up .47 while WTI is at $91.90 up .79.
Here's the story from FT Alphaville:
The spread between the two main global oil benchmarks, West Texas Intermediate and Brent, is blowing out (again). And it’s been doing so for most of the month. 

We’ve known for a long time, of course, that WTI futures are partial to underpricing distortions due to the contract’s over-reliance on the Cushing delivery point in Oklahoma. This has a tendency to clog up due to limited capacity and one-way crude flows,  a phenomenon that has recently become known as ‘Cushing syndrome‘.

The trouble is, this time ’round, it looks increasingly like the widening might be as much to do with tightness in the physical Brent crude market (that made of Brent, Forties, Oseberg and Ekofisk crudes) as it is to restricted capacity at Cushing.

Data from the ICE Futures Europe — home to the most liquid and popular Brent futures contract on the market — shows, for example, that four days ahead of expiry there are still more than 122,000 February contracts waiting to be rolled on, exchanged for physical or cash settled.

The physical market for Brent, however, is tight — something which John Kemp at Reuters suggests could create a lucrative opportunity for those positioned accordingly.
As he explains on Wednesday:
It would be surprising if one or more large dealers and physical traders had not anticipated this tightness by establishing large long positions in the spreads or the underlying physical, tightening the market even further....MORE