A few years gone, most retail trading was concentrated in shares and currencies. Commodities and rare metals like oil or gold were for experienced and professional traders with large portfolios. Most of the action in the commodities markets was carried through futures exchanges, and trading was in giant lots.
Today things are modified. Commodities are traded everywhere and spread betting traders don't miss a chance to have some oil lubricating their portfolios. Trading occurs in tiny fragments and a spread better can place trades of just 50p per point at Finspreads or Town Index.
Spread betting suppliers usually offer 2 flavours of oil to trade on: Brent Crude and WTI Crude or Light Sweet. There are other types of oil but those 2 are the most important and the ones you are most liable to find inside spread betting.
Brent Crude comes from the North Sea and is a blend of a few types of crude from the region. It is accountable for something near 70 or 75% of all oil trades around the Planet. Nevertheless in the US, WTI is utilized as reference instead , being cited in the news, TV, and all info sites.
WTI stands for West Texas Intermediate. This is prime quality oil with tiny quantities of sulphur, making it sweeter. That is why it is also known as light sweet oil.
The difference in quality makes WTI stand out but it does not mean WTI is costlier. Actually at the time of writing, WTI is less expensive than Brent. The rationale is perhaps because quality is just one of the items that are accounted for when the price forms. There are plenty of other variables to account for. Historically they have costs that on average don’t differ much from one another and when the spread widens, it tends to change back with time.
Spread betters can trade Brent Crude, WTI Crude, and the most notable difference between the 2. One conventional market in which investors like to trade is the Brent-WTI spread. That's essentially the difference in price between the two: Brent Crude price less WTI price. It is similar to being long the Brent and short the WTI. Because this spread has a tendency to 0, traders like to put trades when it dilates too much or when they think there are reasons for the cost of one sort of oil to move faster than the other.
The level of economic activity and, in particular, future prospects for growth are main drivers for oil costs. If the global economy is ready to expand quickly then more oil will be wanted to produce and thus the oil price is pressured up.
Regional Differences in the Oil Market
There are several factors influencing oil prices and that will account differently for each kind of oil and thus to switch the Brent-WTI spread. Regional supply, interruptions in supply and natural catastrophes all affect unequally the 2 types of oil. Hurricanes having an effect on the Gulf coast typically have a tendency to raise WTI cost. They cause interruptions in the regions and led to price increases. Regional demand is also key for costs. WTI is more frequently seen within the US while Brent more in Europe and in the developing World. If GDP expansion in US is way better than Europe in general, WTI may increase faster than Brent. When China is growing quicker, perhaps Crude can be pressed higher.
Politics is affecting the economy and so the oil market. This year we aided to instability in the MENA region. Issues in Libya, Egypt, Saudi Arabia, and many others, led on to some interruptions and to expectations of future interruptions that weighted more on Brent than on WTI.
Pipelines and the general framework to conduct oil to the final customer or to refineries are also of crucial significance. In the USA there are several pipelines connecting the Gulf Coast up to Canada and to conduct oil round the country. This year there was an inversion of oil direction inside the pipeline framework that resulted in an accumulation of oil at Cushing, Oklahoma, pressing WTI price down that led on to a record Brent-WTI spread.
To know the direction the Brent-WTI spread will take, a trader desires to judge all the factors that will create regional differences and change the demand-supply equilibrium differently for both categories of oil.
Historic Relation Between Brent and WTI
It is now time to look at some data to more clearly comprehend the connection between the 2 types of oil.
The following table shows correlations, price changes and the spread for Brent and WTI for the period between 2005 and 2011. The dataset ranges from 20th March 2005 and 20th December 2011. This way, data for. 2005 and 2011 does not include the full year.
The correlation between Brent and WTI is high although variable across time. If we take a look at yearly price changes we clearly see that when the price changes in one particular direction for Crude then it is anticipated that the price for WTI changes in the same direction and with similar strength and vice versa. Regarding the Brent-WTI spread, it is less than 2.00 on average but this year it dilated to a mean of 15.44.
The above chart shows that Brent and WTI move very closely but Brent jumped a touch more in 2011 creating a type of an opening between the two. The chart below shows that the spread touched near 30 this year but started decreasing after that time and now sits below 10.
Start Trading the Brent “WTI Spread
Now that we have identified the key drivers for price in the oil markets and after studying the relation between Brent and WTI, it's time to use the info and information to place spread trades.
As we have learned, you ought to have under consideration that: 1) the spread depends upon the evolution of each oil market separately, and there are several regional factors that may affect it as we have seen, and 2) the spread tends to revert to near 0 after dilating.
After studying the market, it is time to place the trades. Capital Spreads, for instance, allows you to trade immediately on the Brent-WTI spread. Others that don't have such a market still allow you to do the same. Just stake the same amounts on each oil market but in opposite directions and you will get the same position as you would with a spread market. It is that easy. Nevertheless, there some downsides deriving from the simulated position: it'll require you a bigger margin duty, as the system won't offset the risks of the long with the short position; it'll cost more vis spreads; it will require more attention, because you'll need to watch two positions rather than a single one; it will require changes in stop levels, as you can’t set a stop for the whole portfolio losses but simply for each product.
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