The Collapse of the Brent/WTI Trade?

It was all the way back in June when we first touched on the unique opportunity being presented in the pricing differences between Brent Crude and WTI (West Texas Intermediate) Crude. With Brent in backwardation (meaning further out months are less expensive than the nearest months/spot price) and WTI in contango (meaning just the opposite, that further out months are more expensive than the nearest months/spot price),  traders found themselves facing a unique opportunity. By shorting the negative roll yield in WTI Crude futures and going long the less negative to positive roll yield of Brent Crude futures, they were able to exploit price differences in economically similar products in an effort to turn a profit. Such is the nature of a spread trade.

As we showed in our last post concerning the Brent/WTI spread, this trade had been going gangbusters since about October of 2008. Well, as often happens, all good thing must come to and end, and here in October of 2011 – this trade has started to unwind as WTI has shifted back to backwardation rather aggressively.

Zerohedge commented on this not too long ago, stating:

It is the huge shift in the whole WTI crude complex that is perhaps more fascinating. For the first time since May 2011, Dec 11 WTI is more expensive than Dec 12 and in the last three trading days alone, the entire curve has shifted to backwardation very aggressively.

Here’s what the futures curve for both Brent and WTI looked like in June against what they look like today. You can see that Brent has steepened (more backwardation), while WTI has flipped, going from Contango to Backwardation.

Disclaimer: Past performance is not necessarily indicative of future results.

What has this meant for the long Brent Oil/short WTI Oil trade? It has unwound some, but perhaps not as much as we would expect (probably because of the Brent seeing more backwardation – or perhaps because these positions haven’t rolled many times yet, where the roll cost/yield will be seen). The profitability of this trade since October 1st can be seen below:

Disclaimer: Past performance is not necessarily indicative of future results.

Of course, when looked at over the last 5 years, this recent move is little more than a hiccup for this spread. Time will tell if the highs have been made and the spread starts the long retracement down, or whether this is a temporary pullback before the spread starts to widen again.

Disclaimer: Past performance is not necessarily indicative of future results.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.