Client:
Crude oil traders
Challenge:
Hedging U.S. Gulf Coast vs. Europe cargo trade
Solution:
The product suite of CME Group WTI vs. Brent spreads, outright futures, freight contracts, and grades differentials can all be used for varying transatlantic arbitrage trading needs
Overview
The significance of the transatlantic crude trade continues to grow, as highlighted by the rapid growth in U.S. crude oil exports and the inclusion of WTI Midland cargos in the Brent pricing complex. CME Group offers a range of instruments that allow traders to hedge the volatile spread between the U.S. and Brent-related oil markets.
Approach
Example one: locking in a Brent price for a U.S. supply deal
A trading company has a term supply deal of one Aframax cargo of WTI Midland FOB Corpus Christi at a floating Argus WTI Houston-related (“MEH”) price. In April, the balance-of-the-year forward curves for WTI versus Brent and Dubai imply that the best netback value for the cargo is provided by the European market, into which he will eventually place the cargos on a Dated-related basis. The trader decides to lock in the arb economics with a paper hedge for the next six months. For cargos loading May – November and landing June – December, he will:
| Buy the Jun – Dec WTI-Brent calendar strip (Code: BK) | Pay | -$5.95 |
| Sell Jun – Dec Brent DFL (Code: FY) at +.25 | Collect | $+.25 |
| Buy May – Nov WTI Houston (Argus) vs. WTI Trade Month (Code: HTT) | Pay | $2.15 |
| Net Long May – Nov WTI Midland at Houston vs. Jun – Dec Dated Brent | at | -$4.05 |
The trading company is now long May – November WTI Midland at a $4.05 discount to his target European Dated Brent market, which he believes will more than cover his freight and loading costs. The futures will price out along with his supply deal and subsequent physical sales into the Dated market.
Example two: trading the paper arb
The arb is open to deliver cargos of WTI Midland into Northwest Europe. With Gulf Coast refiners coming out of turnaround in May, a trader believes that the U.S. will not have sufficient supply to export at a high rate. He wants to express the point of view that the arb for June loading must close by using liquid paper instruments, and executes 100 contracts of the following instruments at the per barrel prices below:
| Buy Jun WTI Houston (Argus) vs. WTI Trade Month (Code: HTT) | Pay | $2.25 |
| Buy Jun/Sep WTI time spreads (Code: CL) | Pay | +.25 |
| Buy Sep WTI vs. Brent (Code: CL/BZ) | Pay | -$5.30 |
| Sell Jul Brent DFL (Code: FY) | Collect | +.25 |
| Net Long the Arb | at | -$3.05 |
On April 23, the trader sees the market has shifted, with WTI Houston differentials and WTI time spreads strengthening to close the arb. He wants to cover his position and lock in $.80 in profit.
| Sell Jun HTT | Collect | $2.75 |
| Sell Jun/Sep WTI time spreads | Collect | +.45 |
| Sell Sep CL/BZ | Collect | -$5.30 |
| Buy Jul DFL | Pay | +.25 |
| Exits the arb | at | -2.35 => profit of $.80 |
The hedging and trading opportunities for transatlantic crude oil trade are numerous. For more information about the products used above or other transatlantic arb products, please refer to the list below, or contact energy@cmegroup.com.
Selected CME Group Transatlantic Arb futures Products
Category |
Clearing |
Globex |
ClearPort |
Product Name |
|---|---|---|---|---|
Arb Futures |
BK |
BK |
BK |
|
TBK |
TBK |
TBK |
||
WHB |
WHB |
WHB |
||
WBX |
WBX |
WBX |
||
Grade Differentials |
HTT |
HTT |
HTT |
|
HIB |
HIB |
HIB |
||
ANT |
ANT |
ANT |
||
FY |
AFY |
FY |
||
Outright Futures |
CL |
CL |
CL |
|
BZ |
BZ |
BZ |
||
CY |
CY |
CY |
||
CS |
CSX |
CS |
||
Freight Futures |
USE |
USE |
USE |
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