Monday, February 14, 2011

Brent/WTI Spread: It's Crazy

I mentioned what I thought then big ($4) spread between Brent and WTI futures here. It was 3.5 months ago. Today's spread is whopper: over $16!

Obviously, this spread has nothing to do with real product supply/demand. Difference between Brent and WTI processing is around $1, and usually it's easier to process WTI. So the only explanation for the difference is supply/demand situation on the futures market. It's not about oil, it's about paper. The question is, why Brent paper, traded on ICE, is much more expensive than WTI paper, which trades on Nymex. I don't have an answer, but there are several ideas which require additional digging.

Idea 1: CFTC started enforcing wash sales rules. In futures world, wash sale is a sale, where buyer and seller are essentially the same entity. This is going on for years, many countries with national (i.e. government owned) oil companies also set up sovereign (again, government owned) investment funds in US, which invest, among other things, in oil futures. It would be a good idea for CFTC to stop such activities, by I've seen no proof that it has any intention of doing that. If it were true, sovereign money could move to ICE, which is governed by British law. Variation of this idea: volume of wash sales sharply increased lately on ICE, without much change in US.

Idea 2: Oil futures suddenly became popular as an investment class in Europe. This happened not long ago in US, right now money is moving to the stock market. Maybe in Europe process of investing in commodities future is just starting? It's very hard to find any information supporting or disproving this idea.

Maybe there are some other ideas out there?

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