WTI/Brent Saga Continues
Today's Idea
Given the extremely volatile political situation in the Oil producing regions of the world, the Oil market is likely to be just as volatile. While it could be tempting for traders to enter into WTI-Brent Crude Oil spreads, there are many factors that could make the spread extremely risky – different markets, different exchanges, different supply dynamics, etc. For this reason, some traders may wish to focus on the US Oil market and consider entering into a futures spread, buying the April and selling the May futures contracts for a difference of 1.75 or greater to the May contract. Some traders may wish to look for the spread to narrow to 1.00, and they may wish to protect the position by exiting on a close of 2.25. The trade risks roughly $500 and has a maximum profit of roughly $750.
Fundamentals
The spread between the Brent and WTI Crude Oil could narrow in light of the rising tide of protests sweeping through Africa and the Middle East. The contango between in the WTI could also find itself flattening, as investors could flock to near-month futures contracts. Currently, the market is in a contango because of large supplies in Cushing, and it could be advantageous for investors to take delivery, store and redeliver against back month contracts. After many had initially thought that the contagion of the Egyptian protests was overblown, the protests in Libya have Europe extremely concerned. Libya is a major supplier of Oil to Europe, and there is no way of knowing how long the violence will last. Furthermore, if Gadaffi's regime is overthrown, there is no telling who will fill the vacuum. At the moment, the US supply of Crude is more than ample, whereas European supplies remain tight. If the protests in Libya and other North African and Middle Eastern countries fizzle out, the spread between Brent and WTI could once again widen-out.
Technical Notes
Turning to the chart, we see the April futures contract trading well above resistance at the 92.25 level. Despite jumping almost $9 higher during the session, the RSI remains below overbought levels. The next area of resistance could be found near the $100, which is both an important technical and psychological level. Failure to hold above 92.25 would likely be seen as a technical setback.
Rob Kurzatkowski, Senior Commodity Analyst
