Oil Benchmarks Draw Attention to Spread

Market Trends - 17/09/2015

Enormous swings taking place during normal trading hours are a fixture in today’s energy market landscape. Leaps or crashes of several percentage points are a regular occurrence, and the best example of this is by far crude oil. Factors that are affecting this commodity are the unrest in Asian markets, known to be some of the biggest buyers of oil, though demand is falling in the wake of regional troubles. This has subsequently driven price competition in the region and has caused prices to crash to unheard of levels, not in small part to the post-sanction strategies of Iran. These factors drive emergency measures in some of the world’s biggest producers. Companies like BP and Royal Dutch Shell are forced to cut capex to the bone, lay off workers en masse, and adjust their projections downward into oblivion. Moreover, high extraction costs are forcing companies operating in the tight oil space to become leaner or die off, especially in the United States and Canada.

The United States is currently experiencing its sixth straight week of falling production, with the latest figures showing output hitting 9.117 million barrels per day according to the United States Department of Energy. Storage numbers are harder to pin down however, with the latest report illustrating that two weeks of increasing inventories had been undercut by a surprise drawdown of 2.100 million barrels. Despite the bad news from almost all sources of key data, prices are finding support and buying pressure. Part of the real draw to oil trades may be the narrow $2 gap between the Brent and WTI, the two most significant oil benchmarks. This has historically signified a pair-trading opportunity to vigilant traders, as the widely recognized historical gap of between $8 and $10 continues to shrink. With Brent usually priced the higher of the two, the key to this strategy is to take advantage of the discount in this benchmark, and to begin trading WTI short and take long positions in Brent. The balance between the two trades is weighted equally, as the offsetting yet still potentially profitable positions work to manage risk and control results even during massive price swings.


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