pricing Brent/WTI spread

HeatOilTrader · Post by **HeatOilTrader** » Wed Jul 11, 2007 5:44 pm

Swimming in crude at Cushing (the CL delivery point) as well as the crack spreads, RB is backwardated while HO is in contango...

What historical standard? 1 year, 5 years, 25 years? You'd be surprised how few people realize that CL traded <$20/BBL as recent as '02.

Omega · Post by **Omega** » Thu Jul 12, 2007 12:33 pm

By historical I meant from june 2005. I dont have any data before this time. My point is that on average the spread is around 80 cents but now its really low to around 5 cents. Hence my question why is it so low. I guess since the curve is in contango that means convenience yield is low brought about by the high levels of crude oil at cushing??

Or is this wrong?

IAmEric · Post by **IAmEric** » Thu Jul 12, 2007 3:48 pm

[i]By historical I meant from june 2005.[/i]

I like that Applause

(Not meant as a criticism, just made me chuckle which is always welcome first thing in the morning Beer )

HeatOilTrader · Post by **HeatOilTrader** » Fri Jul 13, 2007 12:54 am

The last two years aren't the best representation for your question. I'm guessing that you're probably under the widespread false assumption that the front end of crude curve (and most commodities for that matter) almost always has a positive carry which isn't the case.

[img]/User%20Files/435/CL1.jpg[/img]

Saw this on the wire today as well which should give you a better explanation...

[i]Big Crude Stockpiles Become A Liability

Owners of millions of barrels of oil in storage around the country have seen an abrupt end to years of heady profits, as market forces that encouraged heavy buying foryears have almost vanished.

Over the last four years, trading outfits have bought far more oil on the market for immediately delivery, known as the “spot” market, than was necessary to meet refiners’ demand. The extra crude has been squirreled away in tank farms across the Gulf Coast and Midwest. The oil could be sold months later for a profit, guaranteed as long as the price of West Texas Intermediate crude futures used as a pricing benchmark was higher in later contract months.

That situation, known as contango, has evaporated over the last few weeks. Market observers are split on the reason behind the flattening futures strip, but one theory holds that speculators believe the price of oil has topped out close to current levels. The wider contango was a mark of the oil boom earlier this decade and represented a belief that declining oil supplies would continually force prices higher.

“Nobody is ready to bet on it going too much higher,” said Ken Miller, vice president of Purvin & Gertz, a Houston-based consultancy. Miller noted that Light Louisiana Sweet, a crude often used as an alternative benchmark to WTI, is trading on the physical market close to $80, a symbolic barrier.

The price premium between months is now just enough to cover the maintenance cost of storing crude, leaving the market in a “no man’s land,” one crude trader says. It also raises the risk of a selloff should the premiums disappear entirely.

“The guys with a bunch of tankage hate this scenario,” the trader said.“It doesn’t pay much to store, but you can’t take profits by selling into a backwards market either.” A “backwards market” happens when oil for future delivery gets more expensive compared with immediate supplies.The further out in the future, the smaller the price. Once rarely thought about, backwardation is now seen as a distinct possibility.[/i]

Omega · Post by **Omega** » Fri Jul 13, 2007 12:30 pm

thanks for this info. It was really good. So historically the market has been in contango. Interesting.

Where did you get the info from?

HeatOilTrader · Post by **HeatOilTrader** » Fri Jul 13, 2007 3:41 pm

The story was from Dow Jones. We use CQG and DTN for data, although I believe you can get historical spot and some historical NYMEX (from what I recall, prompt month through prompt + 3) prices for free from the EIA. For some reason I think they get their data from Reuters.

Omega · Post by **Omega** » Thu Jul 19, 2007 11:37 am

Can someone explain why heating oil curve is in contango despite inventories being below the 5 year MA?

HeatOilTrader · Post by **HeatOilTrader** » Fri Jul 20, 2007 3:54 pm

Short on time right now but this might be of interest...

[url=/User%20Files/435/DieselandHeatStocks20070718.pdf]Attached File: DieselandHeatStocks20070718.pdf[/url]

Omega · Post by **Omega** » Sat Jul 21, 2007 10:46 pm

Thanks for this article. Very useful stuff. I have a question on it mind. If I'm reading this correctly, pre 2007 any distillate above 15ppm was classified as heating oil but now any distillate over 500ppm is now classified as heating oil? Is that correct?

Omega · Post by **Omega** » Sat Jul 21, 2007 11:07 pm

ok..doing some more reading. If I understand this pre 2007 NRLM could be over 500ppm...but now they cannot. But for heating oil it can continue to remain over 500ppm which explains why inventories have fallen.

2 questions then related to the article

1) What is meant by Platt 1

2) How does the EIA get its calculation of implied demand

I'm sure i'll have more questions later ;)