Saturday, April 24, 2010

Trading Crude Oil Spreads: WTI and Brent

Many investors are interested in profiting from their views on the price of crude oil, but may not have considered that trading price differentials between different products. West Texas Intermediate (WTI) and Brent crude oil, offer compelling opportunities for traders.

Two main types of crude oil products traded in the marketplace are based on location and grade. The one we normally trade in North America is West Texas Intermediate, the type of oil entering the United States through the Gulf of Mexico. Brent crude oil is the product located in the North Sea between Scotland and Norway, is essentially the benchmark for the European market.

WTI has slightly lower sulfur content and is therefore easier to refine to meet emissions requirements in place in most Western countries. Therefore, it demands a higher price. The West Texas Intermediate crude has an average historical premium of $1.40 over Brent. However we often see the prices go out of alignment and this often has to do with location and transportation bottlenecks. If crude oil is subject to a shortage in one region and there is an excess supply in another, oil will eventually be redirected, depending on the shipping industry’s capacity to move it around. This redistribution can take a few weeks or months, but over the medium term the market naturally rebalance. Oil tankers are basically conducting arbitrage as they move their oil around the world. In the meantime in the short term market prices can get out of line. (more)

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