Trade Alert: WTI/BRENT Oil Price Spread Widening
For traders interested in CFD and futures trading in the commodities market, there is an interesting anomaly in the market right now, as prices of WTI and Brent Crude oil have moved further and further apart over the past week or so.
Below is a chart showing the price of Brent (in blue) and WTI (in red):
WTI typically trades at a discount to Brent due to the slightly “lower quality” of the oil. While this is something we have seen for years, the price of the two oil blends usually tracks each other pretty closely.
On May 24, this relationship started to break up with a strong sell-off in the market for American WTI oil, most likely due to profit-taking by a very large number of traders who were long on WTI oil.
The price spread we are seeing right now is highly unusual in the oil market, as is also evident in the chart above. The chart shows the price over a period of about 12 months.
One explanation I have seen for this phenomena is that oil traders have become increasingly optimistic about the market as the price of oil has been making new highs over the past weeks and months. With prices reaching about $70 per barrel for WTI and $80 per barrel for Brent, nearly all market participants had turned bullish on oil.
Oil companies saw the higher prices as an opportunity to reduce their inventories, and oil traders happily bought up all the oil that came to the market in hopes of riding the trend further up. This lasted until there were no more buyers left in the market to buy up the oil that oil companies were looking to sell, and prices on US WTI oil in particular, plummeted.
As a result, we now have the largest recorded price spread between WTI and Brent since 2015.
The price gap as of this writing is more than $10, while a “normal” price difference over the past year has been around $3 to $4.
A good way to trade this would be to use CFDs, or trade directly in the futures market for those who have access to that, and place a long trade on WTI while going short BRENT with an equal amount. Due to the very rare occurrence of a spread this large, it is highly likely that this price gap will be narrowing over the next 1-3 weeks.
Featured image from Pixabay.
Disclaimer: The above content is for informational purposes only and should not be considered as investment advice.