WTI crude oil and Brent oil arbitrage opportunities are open. Someone has begun to quietly profit.
- Regain Capital
- 2019年9月9日
- 讀畢需時 4 分鐘
As we all know, WTI and Brent crude oil have a strong correlation. This correlation has reached 0.995351 since 2012. There are many sophisticated investors in the market, including hedge funds, producers, and individual investors that are actively working on this volatility and correlation choosing appropriate financial instruments for arbitrage operations.
WTI crude oil reflects West Texas oil futures, and the price shows the supply and demand of North America's oil market. On the opposite, Brent indicates the North Sea Brent crude oil, reflecting the future price of crude oil in Western Europe, which is greatly affected by the Middle East and Russia.
Even though there is a high correlation coefficient, the differences in production and logistics costs, the price between the two future markets is always wandering within the average spread. In a dynamic market environment, these provide space and reasons for arbitrage traders.
WTI and Brent crude oil arbitrage opportunities are open.
We have observed that since June 2019, the price difference between WTI and Brent crude oils has been shrinking. Especially in the week from August 19 to August 23, as the spread further narrowed, we believe that the arbitrage opportunity has arisen.
As mentioned above, the difference between the two oil prices is in a dynamic environment deviating from the average spread. For a more intuitive reflection, please see the following figure:📷
Since June 2013, the price difference between WTI and Brent crude oils has been changing dynamically (to avoid the error caused by the opening time, we mainly refer to the spread performance based on the closing price), the extreme values are 17.75, -1.23, and the average is 4.83. Through the chart, we can observe the following information:
1. The time and magnitude of the real-time spread below the average range are weaker than the time and magnitude above the average spread;
2. When the spread rapidly expands, the deviation from the theoretical average is higher. The price difference will return in the next few months. The arbitrage strategy can be divided into two categories: one is the short-price difference; the other is the long-price difference.
On August 20th (Wednesday), the price difference between WTI and Brent crude oils narrowed to under 3.50. Considering that the long-term Brent-WTI spread is still likely to continue to widen, it is recommended to long Brent crude oil and short the WTI crude oil to carry out arbitrage. As of Friday (August 23), the arbitrage strategy has already appeared to be profitable.
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However, based on the margin of safety, arbitrage is more secure when the price difference is close to the stability point. The arbitrage trade between WTI and Brent crude oils is a trading strategy that crude oil arbitrage traders have been paying attention for many years.
The impact of the two price movements on the market is limited. However, the deeper causes of this trend will still affect the market. First, with the oversupply of North American crude oil, US exports will increase, which will impact the global influence of the Middle East oil, undermine the effect of OPEC production restrictions, and might even threaten the need to a production shortage, this has laid a hidden risk for the trend of commodities around the world. Secondly, the cost of domestic chemicals and Brent crude oil are relatively high, and the no-need to import American crude has made the price of crude oil in the Middle East to remain stronger than that of WTI, increasing the cost of petroleum derivates on domestic markets decreasing its competitiveness.
Arbitrage method using CFD products as tools
In the financial market, similar arbitrage strategies are distinct and involve a combination of different markets, different targets, various tools, and different maturities financial instruments. The arbitrage methods using CFD products as a tool are mainly the following three.
Carry-over arbitrage: buy high-interest-rate currencies and sell low-interest-rate currencies, and deposit high-interest-rate currencies purchased in the country's banks to earn interest rates in countries with lower interest rates. In simple words, it is the use of the difference in the foreign currency's savings rate to earn higher interest income. The known traders for conducting these operations are this "Mrs. Watanabe" group in Japan.
Triangle arbitrage: This is an arbitrage method that introduces three currencies. It uses three foreign currencies to arbitrage for a temporary deviation from a reasonable crossover price, which makes the actual cross exchange rate consistent with the theoretical cross exchange rate. If the difference between the theoretical cross-exchange rate and the actual cross-exchange rate offered by the broker report is significant enough to correspond with the transaction cost of buying and selling currencies, then there is a risk-free arbitrage opportunity.
Cross-species arbitrage: refers to the sale or purchase of another commodity or contract while buying or selling a particular commodity or contract. When the spread between the two expands to a certain degree, the liquidation is closed. The varieties selected by cross-species arbitrage may be in the upstream and downstream of the same industrial chain, such as corn and starch; they may also have alternative or complementary relationships, such as US oil and Brent oil, or maybe related currencies, such as Australian dollars and the New Zealand dollar. According to mathematical statistics, the time of entry and exit and the ratio of orders for related varieties are determined previously to the operation.
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