CL Spreads

Side Note: Both the WTI and Brent contract delivery points are quite modest and physically limited - in terms of fungibility, there is no way the open interest could come close to accomodating physical delivery beyond a minute fraction of the daily open interest. That isn't really all that unusual for a futures contract, quite frankly. Eurex Bunds and US Ten Year Note futures have open interest way way past the available cash CTD issues into the futures contract.

Local does have a valid point regarding how practical it can be to physically deliver the contracts.

In the context of trading vehicles the contracts are essentially financial proxy instruments. In fact, ETFs have to roll by some approximations 60 - 80K contracts per month in order to satisfy their composite basket requirements.
 
Quote from bone:

That isn't really all that unusual for a futures contract, quite frankly. Eurex Bunds and US Ten Year Note futures have open interest way way past the available cash CTD issues into the futures contract.
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Have the Eurex or 10yr curves been priced fairly when this is the case or do the spreads widen beyond what's implied by current interest rates?

Is it fair to compare these to Oil given the market differences?
 
Eurex curve is priced 'fairly', but Eurex had to enact some pretty drastic fixes over the years - for example, there were incidents where bank desks would corner the market in the CTS issues and blow out the other basis traders. Under those circumstances, the futures curve and the underlying cash curve were understandably quite different. The fix that Eurex eventually instituted was an agreement with the German Government to simply print and issue more CTD issues in the event of a futures basis squeeze.
 
Quote from bone:

Eurex curve is priced 'fairly', but Eurex had to enact some pretty drastic fixes over the years - for example, there were incidents where bank desks would corner the market in the CTS issues and blow out the other basis traders. Under those circumstances, the futures curve and the underlying cash curve were understandably quite different. The fix that Eurex eventually instituted was an agreement with the German Government to simply print and issue more CTD issues in the event of a futures basis squeeze.
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Interesting, will look into that history a little more. Thanks for the info.
 
Quote from local:

The exchange recognizes the implications of not being able to take delivery and is trying to increase storage at the delivery point.
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Oh, really? They don't care a thing about retail traders or financial longs. Because if they did the simple solution would be to follow the Brent example and switch to (better: introduce in parallel for comparison) a cash-settled contract.

Because what we have here is a tacit/gentlemen's agreement (or actually a criminal collusion, but that's immaterial here) that CL calendar spreads should be traded in one direction only (as the carry trade) until the very last hour... So even if some contrarians emerge, they (and I) cannot possibly buy the front month ('a murder' as some called it) and hedge it with the next month, because that contrary trade makes money only in the last hour of the last trading day, where only the gentlemen can trade among themselves (see how they did it this time for their 3-4 point arbitrage profit: http://www.elitetrader.com/vb/showthread.php?s=&postid=3100961#post3100961 )

Brent has never had such problems with steeply contangoed yield curve and 40% roll yield killing financial longs... Because in Brent, if you spotted a 40% mispricing in the front month contract (as CL for March delivery was, at least judging from the fact that during the last hour of trading its calendar collapsed from $4 to $1, with scalpers being able to roll to April at a 0 roll yield!), you would simply hold it until expiry, and let it settle for cash. With that threat of their carry trade unwinding at any moment, the Last Hour Traders Poker would no longer be such easy money. And last but not least, CL trading would once again become an acceptable pursuit for Muslims (who cannot gamble, see the real reason for the Saudi's discarding CL as benchmark in that leaked diplomatic cable: http://totalinvestor.blogspot.com/2011/02/wti-brent-price-divergence-hits-record.html )
 
brent has seen very steep contangoes in recent past - normally not as severe as wti - but still a lot - 3 bucks under in 2008 for example on front spread -
 
Quote from McBet:


Because what we have here is a tacit/gentlemen's agreement (or actually a criminal collusion, but that's immaterial here) that CL calendar spreads should be traded in one direction only (as the carry trade) until the very last hour... So even if some contrarians emerge, they (and I) cannot possibly buy the front month ('a murder' as some called it) and hedge it with the next month, because that contrary trade makes money only in the last hour of the last trading day, where only the gentlemen can trade among themselves (see how they did it this time for their 3-4 point arbitrage profit: I think someone just got introduced to the "game".
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