by Bespoke Investment Group
There's been a lot of discussion recently regarding the Brent - WTI crude oil spread. For those unfamiliar with the term, the spread refers to the difference in price between Brent North Sea crude oil and the West Texas Intermediate crude oil futures contracts. While these two contracts have historically closely tracked each other, in recent months the two paths have diverged. As shown in the chart below, beginning in January Brent crude oil has started to become increasingly more expensive relative to WTI crude. In fact, at current levels the spread is now at record levels and over $20 per barrel.
What's behind the large spread in futures contracts that essentially track the same thing? While there does not seem to be one specific reason, some of the more widely circulated explanations for the widened spread are the unrest in the Middle East disrupting supplies in Europe, excess supplies in Cushing, Oklahoma (the delivery point for WTI), and decreased demand in North America while demand in other parts of the world is increasing. While any number of factors are in play with the wider spread, at some point it will become wide enough to make for a very profitable arbitrage.
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