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The CL Crude-analysis Thread
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The CL Crude-analysis Thread

  #1261 (permalink)
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Spreads Testing

So as a follow up to my prior post regarding spreads, I added another spread yesterday in my tests which has raised an interesting dilemma:


CL Calendar Spread:

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Intra-Market Spread - CL vs CO:

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My latest trade opened yesterday began pretty poorly, trading around $0.30 lower before finally turning on its head midday today. I took the trade initially as I had seen CL was up 3% yday but CO only 1.5% and CO is usually the stronger performer. The odd finding is, ever since going in my favour, my other trade (CLV5/CLZ5) has turned and erased some of the earlier gains. This afternoon alone the spread has widened almost $0.20 erasing around $250 worth of P&L today. My two dilemmas are:

I'm not sure if this is simply just coincidence or if there could be some correlation between Brent's performance > WTI and the CL Oct v Dec spread. If there is a correlation, is this some form of spread hedge? If it is coincidence do I let it play out and hope it corrects in my favour? Do I treat them independently?

Secondly, Initially I had a firm idea of where my SL would be and the risk I was willing to take. I'm unsure of how to manage them once onside though. Seeing as spreads move much more slowly in general, I'm inclined to leave them both on and play out, however, it would seems stupid to let the trade go all the way back to B/E or to my SL.

Anyone care to throw some thoughts/suggestions in?


Last edited by CobblersAwls; August 26th, 2015 at 05:09 PM. Reason: updated labels on charts
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  #1262 (permalink)
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Well firstly, I would mention that you now have prompt month crude positions in fact there is only 13 trading days left for the Brent postion.

I'll quote an old post of mine below. This data is now 6+ months old but standard deviation of the move in the front month spread is/was 18.8c vs 8.9c in the second spread ... ie double! I'm sure analysis of Brent/WTI would be similair. ie Your now taking a lot more risk than you were.

SMCJB View Post
I suspect we are talking about different things...

To put this in perspective below are two slides from a presentation I gave a few months back.
CL01 refers to the prompt month for outrights, and to the CL01-CL02 spread for spreads and to the CL01-CL02-CL03 Butterfly for Butterflys.
Other than that I think they are self explanatory.
Remember that vol scales proportionally to the square root of time. So if the 1 day standard deviation of CL01 price change is $1.37 we would expect the 1 month/20 Day standard deviation to be $1.37 * SQRT(20) = $6.12. On the other hand we would expect the 1 Month standard deviation of the CL10-11-12 Butterfly to be $0.05!
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Re: Brent-WTI as I've mentioned before Brent is now the World Benchmark (no matter what the CME marketing literature tells you) and WTI represents a land locked crude that at times doesn't have a home. Mid-American crudes now flow south to the Gulf Coast, which prices relative to Brent, but that pipeline capacity is limited. In theory at least, the Brent-WTI spread will widen when world crude fundamentals become tighter (upward pressure on Brent) or when WTi/mid-American fundamentals weaken (downward pressure on WTI).

I'm not currently tradiing Brent (been threatening to restart now for about 6 months) but a good friend who trades a lot of Brent-WTI (professional not retail) is generally bullish that spread - ie looking for it to widen.

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  #1263 (permalink)
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SMCJB View Post
I'm not currently tradiing Brent (been threatening to restart now for about 6 months) but a good friend who trades a lot of Brent-WTI (professional not retail) is generally bullish that spread - ie looking for it to widen.

If widening meant to be something about -10, I agree on that Wide spread is benefiting US refineries (read exports). Then inputs may stay higher for longer time, exports are still strong.

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@SMCJB excellent info as always, thanks! I'll be sure to start testing all these findings and see how different maturities act along the curve - especially toward expirations. (On a side note - I also amended my excel sheet that had CLZ5 incorrectly written where it should have also read COV5 from where I copied the sheet into a new tab).


Alphachase View Post
If widening meant to be something about -10, I agree on that Wide spread is benefiting US refineries (read exports). Then inputs may stay higher for longer time, exports are still strong.

I believe he means that the Brent premium will increase and thus the spread widen due to the locational detriments of WTI. Is this your view too?

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@MktOutperform: Crude: 9 trading days away from this being the longest period in history below its 200-day moving average. $CL_F pic.twitter.com/ntVQV2EehY

https://twitter.com/MktOutperform/status/636669483348660224

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Alphachase View Post
If widening meant to be something about -10, I agree on that Wide spread is benefiting US refineries (read exports). Then inputs may stay higher for longer time, exports are still strong.


CobblersAwls View Post
@SMCJB excellent info as always, thanks! I'll be sure to start testing all these findings and see how different maturities act along the curve - especially toward expirations. (On a side note - I also amended my excel sheet that had CLZ5 incorrectly written where it should have also read COV5 from where I copied the sheet into a new tab).

I believe he means that the Brent premium will increase and thus the spread widen due to the locational detriments of WTI. Is this your view too?

WTI used to be premium Brent so there's still a contingent of the market who quote it WTI-Brent even though WTI is now negative, so yes I believe we are saying the same thing.

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  #1267 (permalink)
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I am planning on buying some USO shares. I think crude is reversing, rising for a while at least.

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ElChacal View Post
I am planning on buying some USO shares. I think crude is reversing, rising for a while at least.

Not saying you are wrong, but you need to provide something more for the post to be of any use.

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Big Mike View Post
Not saying you are wrong, but you need to provide something more for the post to be of any use.

Mike

Sure Mike. Well, I have found that CL follows the hedgers closely compared to other commodities and they are in an relative extreme net long position this week. So next week they would go net short meaning they are long the cash commodity expecting to sell the product they hold at a higher price.
I am buying USO instead of QM or CL because I don't have enough money in my account.

There was also a bullish candle with significant volume that I interpret as buying pressure yesterday. That is triggering my entry signal.


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EIA improves monthly reporting of crude oil production - Today in Energy - U.S. Energy Information Administration (EIA)

EIA revised production down for January thru May. June estimation down by 100k against revised May data. Revisions due to change in the methodology.

PSM is coming out later today. Use wisely


Last edited by Alphachase; August 31st, 2015 at 09:57 AM.
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