There has been a lot of speculation that oil will go to $120/barrel or even to the previous high of $145/barrel. A risky prospect considering that the only driver behind the move would be further instability in the Middle East. An easier oil trade to play is the Light Sweet to Brent Crude trade.
The divergence between Brent Crude and Light Sweet has been well documented. Inventory levels at Cushing, OK are still relatively high while supply of Brent crude in the North Sea has been dwindling. As a result, we have been seeing the light sweet crude falling well below Brent. Fundamentally, Light Sweet crude is easier to refine than Brent crude and has historically traded higher than Brent Crude, although lately that hasn't been the case. At these levels, the divergence of light sweet and Brent is likely a better play than a directional bet on oil.
The trade looks attractive now as the ratio has turned the corner and has come in considerably since its February high. This trade is not without risk. It has been noted that this divergence has been caused by macro changes such as exchange rate fluctuations, insufficient refining capacity of crude alternatives in Europe as well as a moving shift to Brent as the indicator for global oil prices.
Light Sweet Crude to Brent Crude Ratio
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
