Feb

9

First off, here is a definition of VLCC.

The price spread between front-month London Brent crude futures ($101.54) and front-month West Texas Intermediate crude futures ($86.5) is now a record $15/bbl (or about 17%)…. with Brent (Bloomberg symbol=COH1, IB Symbol=COIL) over WTI (Bloomberg symbol=CL1, IB symbol=CL). Brent is deliverable against the WTI contract at a $0.30 DISCOUNT!!

Spot month pricing can go anywhere since it takes a while to charter a ship and move it across the Atlantic. Suffice to say, it doesn't cost $15/bbl move a barrel of crude from Cushing to London. And since the USA is a net importer, it's only a matter of time before VLCC's get diverted from the USA market to the foreign markets. This spread is usually between $0 and $3 with WTI *over* Brent. (The relationship started breaking down long before the Egypt/Suez fears, and can be attributed to a combination of North Sea production problems and an inventory build in Cushing, Oklahoma.)

Savvy specs and commercials can look out the curve and see opportunities — for this spread to close — taking account of shipping rates, insurance, refinery utilization, etc. This bona fide arbitrage will eventually close. The only uncertainties are the path and duration of the mis-pricing.

Over at my blog, I've started filling old scotch whiskey bottles with WTI crude and flying them back to London– providing "liquidity" in this crazy market.

p.s. I've started putting the trade on in the back months. But I've got TONS of dry powder, and am not calling a bottom. And The Chair should note that this is NOT a trend-following trade. It's real arbitrage.


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