What Caused the Jump in the Brent/WTI Spread?

Includes: BNO, OIL, USO
by: Alex Filonov

I mentioned what I thought then big ($4) spread between Brent and WTI futures here. That was 3.5 months ago. Yesterday's spread was a whopper: over $16!

Obviously, this spread has nothing to do with real product supply/demand. The difference between Brent and WTI processing is around $1, and usually it's easier to process WTI. So the only explanation for the difference is the supply/demand situation on the futures market. It's not about oil, it's about paper. The question is, why Brent paper, traded on ICE, is much more expensive than WTI paper, which trades on NYMEX? I don't have an answer, but there are several ideas which require additional investigation.

Idea 1: CFTC started enforcing wash sales rules. In the futures world, a wash sale is a sale, where the buyer and seller are essentially the same entity. This has been going on for years, many countries with national (i.e. government owned) oil companies also set up sovereign (again, government-owned) investment funds in the US, which invest, among other things, in oil futures. It would be a good idea for the CFTC to stop such activities, but I've seen no proof that it has any intention of doing that. If it were true, sovereign money could move to ICE, which is governed by British law. A variation on this idea: the volume of wash sales sharply increased lately on ICE, without much change in the US.

Idea 2: Oil futures suddenly became popular as an investment class in Europe. This happened not long ago in the US. Right now money is moving to the stock market. Maybe in Europe the process of investing in commodities future is just starting? It's very hard to find any information supporting or disproving this idea.

Maybe there are some other ideas out there?

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