Wacky World of Petroleum
Thursday, September 8, 2011
The petroleum market has seen a series of imbalances for some time. The correlative bonds between markets have been broken in the WTI vs. Brent, WTI vs. RBOB, and so on. This gives traders a variety of spread strategies to consider, with the expectation that the correlation in these markets may come back in-line. Some traders may wish to consider entering into a long WTI-short Brent Crude Oil spread, for example, looking for the spread between contracts to narrow to the low 20's. This spread can be considered extremely risky, since it trades on different exchanges and has extremely high volatility. Also, there is no stop/loss mechanism. Some traders may also possibly want to consider entering into a Crude Oil/RBOB crack spread, buying Crude and selling Gasoline with a target price of 0.50/gallon for the spread.
Fundamentals
The correlation between WTI Crude Oil and several other markets has been broken, most notably with Brent Crude Oil and RBOB Gasoline. The WTI/Brent Crude Oil spread widening to epic proportions has been well documented, but there are also widening imbalances between multiple varieties and grades of Crude Oil. Dubai and Light Louisiana Sweet varieties are still trading north of the $100 level, which has translated to high Gasoline prices relative to the benchmark NYMEX Crude Oil contract. There are a variety of reasons for the price discrepancy between the various grades. The Light Louisiana contract is impacted by the hurricane season, Brent supplies are tight when compared to demand, and there is a supply glut at Cushing, the NYMEX delivery point. There is also the hedger/speculator effect impacting the WTI contract. Many large traders have been using Oil futures as a hedge for their long stock positions, since Crude Oil is a universally used commodity, and it can be used to hedge both domestic and international equity positions. Speculatively, Crude Oil can be used as a macro-economic play by traders who do not wish to trade individual stocks, sectors or indexes. The reasons for the deviation in petroleum and products are great in number and offer traders a variety of trading scenarios.
Technical Notes
Turning to the chart, we see the October Crude Oil chart once again testing the 90.00 mark after rallying late in yesterday's session. Failure to close below the 20-day moving average suggests that a near-term low may be in place.
Rob Kurzatkowski, Senior Commodity Analyst
