by MrBill » Fri 03 Mar 2006, 06:06:47
WTI is a lighter and sweeter grade than Brent, which is why it normally trades at a premium, but at the moment, the US is well supplied and refiners are taking down time for maintenance ahead of the summer driving season and the switch to ethanol from MTBE and to lower sulfur diesel, so the stocks of crude are piling up in the US.
Of course, the basis of futures trading is the risk or promise or threat of physical delivery. No one wants physical delivery of WTI at the moment so they are discounting it. But the situation in the US does not reflect the global risks from terrorism and the threats of supply disruptions, therefore Brent is still well supported.
Basically, the way I see it (feel free to disagree) is that the US is an end consumer, but Europe is both consumer and exporter. They import crude from the N. Sea, Russia and the ME, but when they refine it into products, Europe uses more diesel and less gasoline, so they export gasoline to the US. When the spread gets wide enough, you can also arbitrage Brent into the US at a discount. Therefore, I look at Brent as sort of an all purpose medium grade versus WTI which is a specific grade meant for US consumption.
That may not make too much sense, but seems to explain why on average Brent trades at a discount to WTI, but right now, with the bathtub overflowing and the drain partially plugged, why the US is discounting WTI at the moment even in the face of possible supply disruptions elsewhere. But this only affects the April contract. If you look at May forwards, you will see WTI at a premium to Brent again.
In my opinion, WTI at a discount is a screaming buy. Buy WTI, sell Brent. When it rallies, sell your WTI. When it falls, buy your Brent back.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
free of course).
