Where Is WIT/Brent Arbitrage?

Includes: BNO, USO
by: Alex Filonov

There is one thing I don't understand about the oil market. There are two major standard oil contracts on futures markets. There is West Texas Intermediate, aka WTI aka Texas Tea, traded on Nymex. And there is Brent, which is oil extracted from North Sea and traded on ICE. Usually price difference between WTI (what is usually presented to us by TV networks and internet sites as a price of oil) and Brent is below 2 dollars per barrel. But quite often this price difference can jump to 3-4 dollars in either direction.

My question is: How can such a price difference exist and why can it stay for several days? Historically, the price difference is below 2 dollars, so why is there no simple price arbitrage? If the difference is above 3 dollars, sell more expensive oil and buy the one which is cheaper. Close contracts when the price difference falls below 2 dollars.

Things would be much easier if there was a good liquid ETF for Brent. The existing one, The United States Brent Oil ETF (NYSEARCA:BNO), is not liquid at all. There are days when it's not traded at all and average daily volume is just about 12000. If it was liquid, it would be possible to short BNO and long USO, or vice versa. Of course, oil ETFs don't represent the price of oil very accurately, and such a trade would be riskier than a direct futures trade. Anyway, I would consider this trade if and when BNO becomes liquid.

So, why there is no arbitrage?

Full disclosure
: No positions.