Is crude oil trading above $100 per barrel or under $90 per barrel? The answer is “yes,” even though that doesn’t make much sense to the casual observer of crude oil prices.
Let me explain this oil price oddity for energy and commodity investors. As of yesterday, oil in London is trading comfortably above $100 per barrel. However oil in New York is trading comfortably under $90 per barrel.
The first thing you need to know is London oil and New York oil, while both crude oil, are not the same; they represent different grades. London oil is “Brent” crude from the North Sea. Brent is produced on the water and as a result can be shipped by water anywhere in the world. While Brent comes from the North Sea, it also closely represents the oil from Saudi Arabia and Russia and therefore is more “global” in nature.
New York oil (the price generally quoted by the U.S. media) is “WTI” or “West Texas Intermediate,” and is the benchmark for domestic pricing in America. WTI crude oil is now cheap in relation to Brent crude oil, just about the cheapest it has ever been by comparison.
Recently New York oil reached a record discount to London. With London trading at $102 to $103, New York was trading at an incredible $18 discount or $84 to $85/barrel.
So the question arises, is there a trading opportunity here? Yes, I believe so. While there have been reasons for this record large discount of New York oil to London (including but not limited to regime changes in the Middle East), I am starting to see signs the “spread” between the two is overdone.
Sophisticated commodity traders with risk capital may wish to consider buying New York WTI and shorting London Brent on a “spread” with the Brent $18 or more over the WTI. I would risk to a $20 difference looking for a $12 difference or less. This would be a speculative risk of about $2,000 per spread traded, with a profit target of $6,000 or more.
Equity investors would simply be wise to acknowledge the focus of their investments. For instance, the iPath S&P GSCI Crude Oil Total Return ETF (NYSE: OIL) is benchmarked to WTI crude oil — not Brent.
George Kleinman is president of Commodity Resource Corp. has been trading oil futures for over 25 years, and has developed a systematic & disciplined approach to trading oil that helps us navigate the treacherous waters of crude oil futures To trade oil with him or have George trade on your behalf, write him at firstname.lastname@example.org.