CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Brent-WTI crude spread could provide a trading opportunity

With the spread between Brent crude and WTI widening to three-year highs, could we be set for a reversion to mean?

anonymous

Publication date : 2018-06-04T16:37:19+0100

Oil rig

Source: Bloomberg

Crude prices have been diverging over recent months as the shift in the dynamic of oil supply alters the price of one type of product over the next. With both Brent and WTI hitting three-year highs in recent months, there is an understandable difference in price between the two forms of oil, owing to the changing dynamic behind regional supply. The overabundance of WTI under the growing shale output within the US has ensured a lower rate of ascent compared with Brent, which is based on a light, sweet crude coming from North Sea oil fields. To a large extent there is little reason to believe the US is about to reverse the trend of growing output. However, with the US having lifted the ban on exporting crude abroad, there is reason to believe that the US will become the go-to source of oil in Asia, due to its more competitive price. With that in mind, it makes sense that this historically significant gap between these two main forms of crude will soon start to close once more.

Looking at the chart below, the rise in crude prices has certainly been more pronounced for Brent (grey) than WTI (green) in recent weeks. The spread (lower panel) between the two is now approaching $11; levels not seen in over three years. On that occasion, the gap between the two forms of crude provided a mere flash in the pan, with the spread only remaining above $10 for less than a week.

Brent-WTI chart

Brent-WTI chart

Brent-WTI chart

This makes for a potential reversal to mean situation, where we could see selling more heavily focused on Brent crude, while gains become more geared towards WTI. Perhaps this is the beginning of a new norm, yet if we see that spread fall back below $10, there is a strong chance we will start to see a shift back to norms of $2 to $3. With that in mind, if the spread between WTI and Brent falls back below $10, it would make sense to buy WTI and sell Brent.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Clients can lose more than they deposit. All trading involves risk.

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