First Chapter

WTI or Brent:

One of the most talked about issue now being the status of WTI being a price leader. Much has been written about this recently, even appearing in an FT article http://www.ft.com/cms/s/0/354bec6a-e36f-11dd-a5cf-0000779fd2ac.html. This, in my view, will be an on going discussion for many months as Brent is declining in production and replacing WTI with Brent will only be a short term solution. Stocks in cushing, the delivery point of WTI, has been scrutinized by almost anyone that has even a slightest interest in this market. The last time cushing stocks peaked was in early 2007 where 4 mio bbl of extra crude in storage resulted in WTI losing over $4 relative to the waterborned Brent crude. This time round it is even more severe as the contango structure leads to ever increasing interest to store crude. Brent crude is also in deep contango, however it has the characteristics of having sour crude oil priced off it. Given OPEC has indeed implemented its cut by a far greater degree of compliance than before, and that another round of cuts are likely in March, SFOT likes to be short the 2nd or 3rd month ti-brt spread as it is less volatile than the front month arb.

Sour crude will be strong.

The fact that Brent is used to set sour crude coming from the middle east gives me comfort in holding on to Brent vs WTI as we know OPEC has cut mainly sour crude and potentially another round of cuts are coming in March. SFOT likes the Brent/Dub diff in q209 as it is still cheap compared to current fixings.