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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved
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Tuesday, October 19, 2021

Brent-WTI Spread Trade

By Century Financial in Investment Insights

Brent-WTI Spread Trade
Brent-WTI Spread Trade

* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.


The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

Past performance is not indicative of and does not guarantee future results. Please read the complete disclaimer carefully.
Trading pairs is not a risk-free strategy. The difficulty comes when prices of the two commodities move contrary to the positions taken resulting in losses. Thus, it is important to adhere to strict risk management rules when dealing with such adverse situations.
Holding cost is subject to change impacting the trade either negatively or positively.
If the spread comes down to -$0.16, in that case, the trade will result in a potential loss of 2.8% on $500,000 with 2x leverage. The potential losses could increase further if the spread drops below -$0.16. The strategy is also exposed to roll over risk in case the positions are held beyond the expiry date.


The strategy behind Brent-WTI spread trade is to take advantage of the fact that the spread in the prices is expected to increase when it is low and vice-a versa.

Generic crude oil futures Contract

Crude oil spreads based on generic contract is currently at around $2.15 (Brent Premium on WTI). The lowest in the last 5 years has been -0.16 while the highest in the last 5 years has been $10.99 on a weekly closing basis. As can be seen in the chart, $2 spread zone offers crucial support, and the spread has bounced from this zone multiple times in the last few years. The highest on a daily closing basis was 63 in the month of April when US crude oil prices turned negative in the wake of pandemic crisis.

Brent-WTI spread Chart


Source: Bloomberg

WTI crude oil prices surged for the 8th straight week courtesy of the ongoing energy crunch and Hurricane IDA, which saw nearly 80% of US gulf oil companies shut down. However, oil and gas supply in the US has continued to recover and less than 20% of US gulf production now remain shut. As the US oil companies increase production, the supply constraints should reduce. Meanwhile, Brent prices also remain elevated topping $85 a barrel as OPEC+ remains reluctant to ease supply cuts that were made during the worst of the pandemic. Despite pressure from the U.S. and India to tame soaring oil prices, OPEC+ has decided to stick to its existing pact for a gradual increase in oil supply. As a result, the Brent will likely continue to trade at a premium.

Besides, the US had long done away its covid restrictions due to better inoculation rates which resulted in robust demand for WTI crude oil. With the world now opening up, especially Asian countries, the demand for Brent is expected to increase further. Recently, China also issued a long-awaited new batch of quotas for its private refiners to buy more crude oil, another sign that the spread could widen from these levels.

The Brent crude oil Mar 2022 contract is currently priced at $82.37 while the WTI crude oil Feb 2022 contract is priced at $80.22 implying a spread of $2.15. Long Brent contract and short WTI contract could result in profitable trade when the spread between the two contracts increases further irrespective of price movement on the upside or downside. On the other hand, it could result in potential losses, if the spread narrows further.

For example, in a $500,000 account, if by going long 6000 units of Crude oil Brent Mar 2022 and simultaneously 6000 units of Crude oil WTI Feb 2022 are short, it would result in a potential profit of ~5% (2x leverage) if the spread were to increase to $6.5. On the other hand, if the spread were to reduces to -$0.16 it would result in a potential loss of 2.8%.

Scenario when spread increases/decreases

No of Units Current Price when spread is 2.15 Exposure Price* when spread increases to 4.5 Potential Profit when spread increases to 4.5 Price* when spread increases to 6.5 Potential Profit when spread increases to 6.5 Price* when spread reduces to -0.16 Potential Loss when spread reduces to -0.16
Long Brent Mar 2022 6000 $82.37 $494,220 $86.62 $25,500 $87.62 $31,500 $75.00 ($44,220)
Short WTI Feb 2022 6000 $80.22 $481,320 $82.12 ($11,400) $81.12 ($5,400) $75.16 $30,360
Spread $2.15 $975,540 $4.50 $14,100 $6.5 $26,100 -$0.16 ($13,860)
2.8% 5.2% -2.8%

*Prices in the 6th,8th and 10th column are based on hypothetical scenarios

Risks and Assumptions for Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data & Prices as of: 19/10/2021
Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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