WTI-Brent

[McBet]

Quote from greg25:

The question is, is there any bottom for this price.. ???? actually an -10,40 and falling !!!!!

If i am not wrong actually we are at the lows of 2009 !!!!

Have you heard of the Royal Dutch Shell pair? It also had virtually the same underlying asset on both sides... well, in fact precisely the same assets...

But as for your question, the crude oil spread (and I would be talking my book here). I sense that convergence is near. This is based on purely technical factors though, while this market can be also strongly driven by fundamentals. So technically speaking, COIL has already bounced 3 times from this resistance level, and therefore should be less upwardly mobile, while CL has simultaneously found support at long-term trendlines, so the spread might just start to converge, especially during regular trading hours for CL.

Always carry a disaster stop though. I've seen simple calendar spreads losing 10k per 1k margin requirements... Remember that SPAN is only a *daily* loss estimate, so we have no right to sit on losing positions for weeks on end (that was my mistake in the early days.

 

[greg25]

I think in this case both technical and fundamental are making effect on this spread... look at the last EIA data, more and more stock in Padd 2 and in general, less inputs in refineries, etc.. and the technical.. also..

The worst think about this spread that is very volatile, at least for me, but also i have to recognized that is liquid so you are able to set up nice stops, and you can sleep knowing that this stops will be placed...

Now with this spread at -11 I will start trying position.. of course with an stop.. may be -12 would be a nice price.. jejejejej

greg

Quote from McBet:

Have you heard of the Royal Dutch Shell pair? It also had virtually the same underlying asset on both sides... well, in fact precisely the same assets...

But as for your question, the crude oil spread (and I would be talking my book here). I sense that convergence is near. This is based on purely technical factors though, while this market can be also strongly driven by fundamentals. So technically speaking, COIL has already bounced 3 times from this resistance level, and therefore should be less upwardly mobile, while CL has simultaneously found support at long-term trendlines, so the spread might just start to converge, especially during regular trading hours for CL.

Always carry a disaster stop though. I've seen simple calendar spreads losing 10k per 1k margin requirements... Remember that SPAN is only a *daily* loss estimate, so we have no right to sit on losing positions for weeks on end (that was my mistake in the early days.

 

[McBet]

Quote from greg25:

I think in this case both technical and fundamental are making effect on this spread... look at the last EIA data, more and more stock in Padd 2 and in general, less inputs in refineries, etc.. and the technical.. also..

The worst think about this spread that is very volatile, at least for me, but also i have to recognized that is liquid so you are able to set up nice stops, and you can sleep knowing that this stops will be placed...

Now with this spread at -11 I will start trying position.. of course with an stop.. may be -12 would be a nice price.. jejejejej

greg

Always enter on your stop! Are you re-entering the spread now that correlation seems to be returning? The heavy contango might be a problem though, it would have to come down or move over to Brent (as you would expect if they started to short the front month there). I think I will add to my APR11 (always give yourself twice as much time) spread once more (I already exited half at B/E), on some spike or other. Yes, at an improved price - you know, "losers average down losers".

 

[greg25]

Finally I did not take position on this spread...

I have "fear of the dark (crude), fear of the dark
i have a phobia that someone's(the fed)
always there" Iron Maiden

greg

Quote from McBet:

Always enter on your stop! Are you re-entering the spread now that correlation seems to be returning? The heavy contango might be a problem though, it would have to come down or move over to Brent (as you would expect if they started to short the front month there). I think I will add to my APR11 (always give yourself twice as much time) spread once more (I already exited half at B/E), on some spike or other. Yes, at an improved price - you know, "losers average down losers".

 

[Trendytrader]

Man the WTI to Brent spread is damn wide. Something has to give. WTI to bring back together. WTI going to $97

 

[McBet]

Quote from Trendytrader:

Man the WTI to Brent spread is damn wide. Something has to give. WTI to bring back together. WTI going to $97

Brent is 5 pts above its long-term trendline, and it expires earlier, so I think it may give first. Unless Bone orders his followers to chase the divergence all the way up to 100

 

[McBet]

Quote from ogarbitrage:

Cushing.

The Cushing syndrome* explains the contangoed yield curve (the time decay in CL is currently far worse than buying front month vanilla options), but not why the inferior Brent is still 10+ points more expensive than WTI... That Brent 10-point premium over "fair" value of around 92 (CL resistance level) requires extra explanation, such as this "cornered market" hypothesis here: http://ftalphaville.ft.com/blog/2011/01/19/463136/more-on-the-wti-brent-spread/

It looks like large players have constrained supply on *both* sides of the spread (of storage capacity in case of WTI and of the product itself in case of Brent). Which is why you cannot do truly risk-free arbitrage by buying some far-month (e.g. December) WTI (already too similar to Brent, merely 3 pts cheaper) and shorting December Brent, because their difference has been arbed away (either by the Cushing locals, or by hedge funds accessing the markets via futures and bidding up farther months in WTI).

Of course such situations cannot last forever (usually ended within a week or two), but they have an uncanny ability to test your patience if you try to extrapolate local trends, forgetting the bigger picture. I'll stay put as long as it takes, the double-digit return on margin possible here (assuming convergence) justifies the capital intensitity and intraday volatility of this spread.

---
*(Cushing storage capacity is controlled by a few large players and prone to manipulation where the owners refuse to lease their empty storage until contangoed yield curve gives them 20-30% annualized, see: http://ftalphaville.ft.com/blog/2011/01/05/449006/an-unjustified-wti-distortion/ )

 

[McBet]

Quote from McBet:

The heavy contango might be a problem though, it would have to come down or move over to Brent (as you would expect if they started to short the front month there).

The yield curve for Brent suddenly turned from flat into upwardly sloping yesterday, with around 0.5 pt difference between each consecutive pair of expiries. That info on its own might be merely the sign of an ongoing rollover (Feb 11th being the last trading day for Brent March contract), and not that this spread might be about to reverse any time soon. However I've noticed the opposite (curve flattening) is happening for CL: calendar spreads are coming down, with each preceding expiry being supported by around 0.2 pt more than the next one. Those two observations combined might be a sign that the pair is finally starting to converge (but don't be too hopeful yet

 

[Daxspreader]

Spread still exploding!

WTI-Brent March -13.27
WTI-Brent April -10.61

Will be interesting to see what happens as we approach the Brent FEB expiration on Friday.

Anyone know if this the widest the 'arb' has been historically?

DS

 

[McBet]

Quote from Daxspreader:

Spread still exploding!

WTI-Brent March -13.27
WTI-Brent April -10.61

Will be interesting to see what happens as we approach the Brent FEB expiration on Friday.

Anyone know if this the widest the 'arb' has been historically?

DS

Well, +/-3 is the typical spread size (and indeed usually in favor of the superior WTI). We are now 4.5 times that typical spread in the front month, so the only comparison of a rubber band getting stretched so far would be small caps during the dotcom bubble. Statistically speaking it is a lotto win already.

CL is probably oversold, maybe even manipulated by locals and/or the authorities, but Brent isn't so clean either (see above). It is not a permanent structural change e.g. due to cost differences, as CL reacted with a five-point rally to the GDP number. The spread definitely started to widen abnormally before the Egypt issue, so the reasons are not rational.