Thursday, May 24, 2007

Oil

Oil is Oil I thought.

Black, oily and highly volatile. For 10$ a tick and multiple 50 to100 tick runs a nice vehicle to trade.

But oil isn't oil. There are two major contracts to choose from:

CL N7 is Light Sweet Crude Oil

COIL N7-IPE is ICE Brent Crude

Both trading at 10$/tick and a minimum ticksize of 0.01

I assumed, that both contracts would trade side by side and tick by tick. It shouldn't made any difference whether you trade the CL contract or the COIL contract.

And that assumption was correct until March 2007. The CL contract traded with a premium of about 1$ to the respective COIL contract. But that began to change in April 2007. Take a look at this Spread chart I created of the continuous contract
COIL #F - CL #F

This is a daily spread chart and as you can see the spread has widened to about 5$ premium for the COIL contract now on a daily chart.

I became curious yesterday, when I noticed the pattern intraday as it became obvious for even the lazy observer. Here a 5 minute spread chart

After the announcement of the Oil Report the spread widened intraday from 4$ to 5$. You know what that means, do you? It means that the COIL contract is worth 1000$ more per contract at the close of yesterday compared to the CL contract with the same delivery and compared to the value of both contracts just a few hours before.

I have no explanation why the COIL contract is worth more now, but I know that this is an exaggeration. So how can you profit from that knowledge?

I assume the spread will narrow again. There is a clear trend to see favoring the COIL contract, but nonetheless Oil is still Oil and over the long run the spread should narrow again. Long Run? I'm not interested in the long run! I'm interested in intraday movements. And intraday I assume this 1$ increase in the spread we saw yesterday will be reduced today. Either by CL catching up or COIL coming down. Will see what happens...

Addendum:

What happened was, that the spread continued to widen to a maximum of 6.70$ with Light Sweet crude breaking down, while Brent crude continued to trade above 70$.

But I finally found an explanation why this is the case.

Read this article The sweet and the sour: a crude conundrum from Phil Flynn to understand it all.

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