Arb Brent vs WTI

I want to short Brent and go long WTI, betting on convergence over the next few months. I was thinking long USO, short BNO. Is this the best way (retail sized trades)? I’m thinking the effects of contango should affect them equally?

Isn’t there a spread you could play between the two?

robber07 Wrote: ------------------------------------------------------- > Isn’t there a spread you could play between the > two? Thats what I’m trying to do.

What are your reasons for the spread to narrow over the next few months?

The spread is $15 between the two. Its do to some technical reasons, but the two are fungible. Sure, the spread could get worse but I’m betting on convergence. Problem…my broker doesnt have any borrowable shares of BNO…any suggestions?

“arb” means riskless profit – you mean “speculate”? last I checked, USO was one of the worst-designed investment products ever created. Try this and related links: http://ftalphaville.ft.com/blog/2010/11/19/410806/commodity-etfs-even-worse-than-you-thought/

I would say there are a lot more fundamental and geopolitical reasons as to why the spread has widened lately. I’d probably try to play equities weighted primarily to one product or the other instead as a retail investor.

Do you have shipping and storage facilities to complete the arbitrage? Remember to factor in the cost of shipping, delivery, and storage into your non-arbitrageable price differences.

DarienHacker Wrote: ------------------------------------------------------- > “arb” means riskless profit – you mean > “speculate”? > > last I checked, USO was one of the worst-designed > investment products ever created. Try this and > related links: > http://ftalphaville.ft.com/blog/2010/11/19/410806/ > commodity-etfs-even-worse-than-you-thought/ Actually, arbitrage is the practice of making bets on the relative difference between assets. Do you think merger arbitrage, convertible arb and other arb strategies are riskless? And I assume your article is about contango or tracking error? Well known pal.

Arbitrage is *defined* as trading activities that generate profit without assuming any risk. For arbitrage to make sense, it also needs to generate a profit higher than the risk-free-rate, since it’s easier to buy a treasury than to execute a true arbitrage that yeilds less of a profit. The fact that people call it merger arbitrage and convertible arbitrage and statistical arbitrage is because they wanted to make the trades sounds like they are almost riskless; but of course they aren’t. Convertible arbitrage is probably the closest to a true arbitrage of the three.

I was wondering about this myself, but figured anything that’s been touched on by Bloomberg/CNBC as a potential arbitrage opportunity must have some moving parts that make it unobtainable, otherwise you can bet GS would have whittled it away by now. Also keep in mind you’re not comparing apples to apples - brent crude and WTI crude are of differing qualities. I forget what the ratio is, and it would actually exacerbate the spread because WTI is considered higher quality, but I don’t like any of the ETN vehicles as a way to mimic the spot market, especially in a leveraged ‘arbitrage’ trade.

bchadwick, you are describing deterministic arbitrage (sure profit, riskless). Only academics think arbitrage is riskless. This is a loose form of stat arb, bets on convergence, reducing factors in a trade, pairs trading etc. I never implied this strategy is riskless. In response you your other question, no, I don’t have, plan to have or need any method of transporting or storage, as long as someone else does. The products are fungible. The prices will eventually converge…I’m hoping sooner than later but thats why its a trade.

1morelevel Wrote: ------------------------------------------------------- > This is a loose form of stat arb, bets on convergence, reducing factors in a trade, pairs trading etc. I never implied this strategy is riskless. This spread is largely driven by fundamental reasons, it may use some of the same tools as stat arb, but imo far from it. …as bchad points out, how would you complete the arb? Just because you’re using futures instead of playing physical, doesn’t mean you can ignore the actual arbitrage relationship. To sundevl’s point, I also don’t think BNO is the right tool to use. Additionally, what makes you think it will converge? What happens if they change the contracts, change margins, etc.? I edited this a bunch, sorry, came across a bit rough at first. Point is, be careful.

You guys keep dancing around definitions. If anyone can help me structure the trade to express my viewpoint, let me know. If you don’t like trade, take the other side.

1morelevel Wrote: ------------------------------------------------------- > You guys keep dancing around definitions. > > If anyone can help me structure the trade to > express my viewpoint, let me know. If you don’t > like trade, take the other side. Buy a call on wti, sell a call on brent.

Thought about doing it with options but can’t find liquid contacts beyond front month. Options on WTI june have a $5 bid/ask spread

Futures, then?

1morelevel Wrote: ------------------------------------------------------- > Thought about doing it with options but can’t find liquid contacts beyond front month. Options on WTI june have a $5 bid/ask spread ‘The spread’ most commonly quoted in the media is the front month contract, isn’t that what you want to trade?

bchadwick Wrote: ------------------------------------------------------- > Futures, then? Nope. That woud be ideal but my broker doesnt do them

now i’m not saying that the spread can’t close a little bit, but the bottom line is that north america has plenty of oil and europe has next to none. i don’t see why the spread would ever stay closed over the long-term. the higher the price of oil goes, the more production you’ll see from US oil shale and Canadian oil sands, both of which need $90+ oil to justify many of the smaller or more difficult to access pools. if algeria goes down with libya, i’d expect this gap to be closer to $30-$40. its a refining issue as well so you’d be surprised about how large the gap can grow… also, as oil increases in price, you’d have to expect that the % difference in price will remain similar to the current % difference as the only way to get the oil across the ocean for true arbitrage is by burning some oil while you’re at it. i’m not an expert by any means, but i’d tread softly in what looks like “easy” profits… if it was so easy, the spread wouldn’t exist anymore…