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

  #1671 (permalink)
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CobblersAwls View Post
Hi @SMCJB

Previously you mentioned being open to questions about spreads on this thread. Seeing as discussion has been a lot slower on this thread than in previous months I thought I would ask some questions that you could answer in your own time. I would also love to hear from others that trade energy spreads.

Sorry for the delay.

Before I start answering @CobblersAwls questions let me first say something about spreads. In this modern day of electronic trading exchange's have products that are refereed to as exchange list futures spreads. Hence if you would like to enter into a spread, for example buying March and selling April, or buying Heating Oil and selling Crude, Or buying Brent and selling WTI, the exchange has a product for that spread itself. The advantage to this is two fold, you can send a single order and get a fill on the spread with no legging risk, and the bid/ask on the spread is normally a lot tighter than the bid/ask on outrights. What actually hits your account though is not the spread itself but the two outright contracts. It should also be noted that a lot of retail trading software does not give you access to these spreads, which makes spread trading almost impossible.

I should also say that one of the most attractive things about spread trading is the extremely low margin requirements. Current margin requirements for the prompt month crude oil contract are $2900, for the prompt spread $460 and the prompt Butterfly $370. For the 12 month contract though outrights are $2650 while the spread drops to $65 and the Butterfly $55


CobblersAwls View Post
I have heard people say that spreads should be thought of as their own distinct market, separate from outrights, with Joseph Choi also describing it as a way to trade the 'second order derivative'. If you agree with this sentiment, could you suggest ways to start thinking about this area? Both from a contextual and analytical viewpoint?

I agree that spreads should be thought of as their own distinct market. Also different spreads within the same commodity will behave extremely differently. We've talked quite a lot about the Natural Gas March/April (NG H/J) Spread in the Options Selling Thread. This spread, affectionately known as the widow maker, and also one of two spreads that Amaranth Advisors lost almost $6B trading (the other being NG V/F) is the end of season storage spread. If we don't have enough Natural Gas the price of March spikes violently as scarcity pricing will prevail. If we do have enough gas though any excess will be left in storage, and as such March will price at a discount to April. April on the other hand is the first month of storage refill and is relatively unaffected by the fundamentals effecting March. Hence March/April can and does swing very violently based upon storage and weather expectations. May on the other hand is the second month of storage refill and is also relatively unaffected by the Winter S/D fundamentals. As such April/May is a very stable spread and behaves completely differently than March/April. (May/June is even less volatile than April/May).

I also agree that spreads can be viewed as a derivative of outright futures prices. And extension of this is that Butterflies can be viewed as a derivative of spreads, or a second derivatives of outright prices.
Butterflies (or "fly") in futures are spreads of spreads! For example if we buy the March/April spread we would say we are Long 1 March and Short 1 April. But if we buy the March/April/May Butterfly we are buying the March/April spread and selling the April/May spread. As such we are Long 1 March, Short 2 April & Long 1 May which I write as +1/-2/+1. Butterflies in Options mean something completely different. I would add that just like exchanges now have 'exchange listed spreads' they also have in some commodities exchange listed butterflies. So you can actually execute the March/April/May butterfly with a single order (In CL, NG & GE at least to name a few)
I would encourage anybody interested in spread trading to first construct a forward curve, plotting the outright prices. This will give a high level view of the shape of the curve. I would then encourage you to construct a forward curve of the spread prices. This will probably yield something quite interesting and will probably prompt some questions. The next step is to construct a forward curve of the butterfly prices. Once you've done that with one month spreads, take a look at 2 month, 3 month, 6 month and 12 month spreads.


CobblersAwls View Post
In Eurodollars I understand that most people will use calendar spreads to express an opinion about the pace of interest rate rises between two points, and use butterfly spreads as a way to take a view on fed 'lift-off' and 'landing' (again taken from Choi).

Ahh Eurodollars (very different than the USD:EUR exchange rate) the largest futures market in the world most people have never heard of. I don't trade eurodollars (aka GE) but given my trading style it's something I've considered. I've read the Choi report I think you are refering to previously and found it extremely interesting.
Note: Just like there are "exchange listed spreads" and "exchange listed butterflys" in some products, Eurodollars actually have "Exchanged Listed Double Flys". Whats a Double Fly? It's a fly spread, ie buy one fly, sell the next fly. For example the March/April/May/June double fly is +1/-3/+3/-1 (ie its +1/-2/+1/0 minus 0/+1/-2/+1! And yes 1 tick wide, 1 order to trade the 8 leg package!

CobblersAwls View Post
What about in the energy markets? Are you just focused on the current contango/backwardation regime and it's steepness/flatness? Are there other things to consider?

Yes that's something I look at a lot. When prices are in contango, spreads are in contango, and butterflies are often in contango. When spreads are in contango, but some butterflies are not, I investigate why. This is what I think of as "Relative Value" trading, and often involves a lot of "Mean Reversion" strategies. If you think your interested in this type of trading you may want to take a look at the following video series. They are presented by Doug Huggins of Quantitative Markets Analysis. They date back to September 2014 and were originally focused on the ICE Gasoil futures specification change. They contain a lot of information regarding market neutral futures strategies in the ICE Gasoil and Brent futures complex's.

Forum (Session 4) 9/2014 https://sites.mhub.tv/Site.aspx?s=f585bc3a-058b-4570-a197-a3a900d569ca&v=f3bf14f8-9624-4caa-b052-a3ab00a29f60
Update 11/4/2014 https://sites.mhub.tv/Site.aspx?s=420b54cb-a997-4ec8-9662-a3d900c622d0&v=dbe2878b-2477-417f-8d91-a3d900c658fb
2 11/18/2014 https://sites.mhub.tv/Site.aspx?s=42880d9b-a225-462d-a262-a3e700fbd7d9&v=c33425e7-9a08-4191-8ad6-a3e700fcb5a9
3 12/2/2014 https://sites.mhub.tv/Site.aspx?s=f1f5a162-6c3f-4c97-8c31-a3f500be0d82&v=e490b1b9-fdc4-4308-a73c-a3f500bea810
4 12/16/2014 https://sites.mhub.tv/Site.aspx?s=f1f5a162-6c3f-4c97-8c31-a3f500be0d82&v=e490b1b9-fdc4-4308-a73c-a3f500bea810
5 1/21/2015 https://sites.mhub.tv/Site.aspx?s=e0130576-1aef-4687-ba90-a42700ecf084&v=8db10e0d-7a17-4e04-9b3a-a42700ee4c34
No #6
7 3/19/2015 https://sites.mhub.tv/Site.aspx?s=ae9d2afe-208e-4b98-9123-a46000ca849a&v=c825b7a0-34d0-4f3d-81fd-a46000f8b52a
8 4/15/2015 https://sites.mhub.tv/Site.aspx?s=70b0c05a-bb89-497a-96c2-a47a00cb48da&v=601e827b-f575-4adb-a78f-a47a00cd13b1
9 5/5/2015 https://sites.mhub.tv/Site.aspx?s=4cac72bf-d928-4654-be74-a48f010c1d05&v=74683637-2680-4336-8762-a48f010cb1c3
10 6/15/2015 https://sites.mhub.tv/Site.aspx?s=778748ca-6f59-4f83-9ebb-a4b800f38e65&v=6f9fe2c5-d9fc-4ce2-93a2-a4b800f65237


CobblersAwls View Post
How do fundamentals factor into your decision making process?

My trading is very statistical in nature rather than fundamental. The one way fundamentals do factor into my trading, is that I don't trade anything that is heavily fundamental driven. The obvious examples are i) I don't trade spreads that are within 2 months of expiration, and have greatly reduced position sizes for anything within 4 months of expiration and ii) I don't trade spreads like the NG H/J that I was talking about earlier.

This is very non-typical of a spread trader. The largest players in the spreads markets are people that have the ability to back up their financial positions with the real physical. An example I gave in a Calendar Spread thread started by @Sailboat was
For example NYMEX's CL or Light Sweet Crude Oil Contract (often incorrectly referred to as the WTI contract) calls for Crude Oil to be delivered to a storage facility in Cushing OK. Many people have or lease storage there, but one international oil major is known to have significant storage there, and has a dedicated pipeline from there to their refinery which process's 430,000 barrel's of crude a day. As you can imagine it kind of gives them an advantage!

CobblersAwls View Post
I have read many discussions on how best to execute fly's/condor's etc. Using a fly as an example, some state that it's best to use an autospreader to leg into 2 cals as you can capture a tighter spread than you'd pay trading an exchange traded fly. However, others argue that this leaves you open to legging risk and slippage and that it's better to just trade the exchange listed fly. What is your opinion on this and does it vary depending on your level of infrastructure and how price sensitive your strategy is?

I do both. Whatever gets me the best fill. But yes I think it's heavily dependent upon your infrastructure. If you have good autospreading tools the leg risk on legging fly's in crude is very small. I use Trading Technologies XTrader Pro and it's autospreader is fantastic. I do also have collocated servers at both Aurora (CME) and Cermak (ICE) though. I doubt the results would be the same using some 3rd rate spreader over the internet. The problem with fly's is that the price changes you are trying to capture are often so small that you really need to be buying on the bid and selling on the offer. That's going to be tough to do by using the exchange listed butterflies. In most cases I get filled on my autospreader, well before I ever do on the exchange listed products. Also consider the following. I know it's not the best way to look at this but it's an easy and simple example. Over the last year, the standard deviation of the one day change of CLZ6 is $1.051, of the CLZ6/F7 spread is $0.024 and the CLZ6/F7/G7 Butterfly is only $0.009. Now consider that to execute a spread you have to pay two commissions not one, and to execute a butterfly four commissions. Very easy to see that unless you have a very high success rate, commissions will kill you. As a NYMEX seat lessee, I can buy a Butterfly, sell it one tick higher and still make a profit. (Not that I'm trying to do that). That's definitely not something you can do as a retail trader.

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  #1672 (permalink)
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$50 and how the market will react

50 is about to be hit on CL, I have delayed data on the WTI but it looks like that will be hit as well. This is coming from the news of a production cap in the near future could happen and come mainly from Saudi Arabia.

However, when you think about when the production cap could be put in place (November), you note that it is a time when production drops from Saudi Arabia either way. Also, nothing has been formalized and even if it was formalized, is there anything strongly in place right now that would prevent Saudi Arabia from just ignoring this come 2017?

Additionally, long term speaking, drilling didn't slow down as much when we started dropping from 100 barrel, but completions did slow down very fast in the US. So that means there's a bunch of wells in the US that have been drilled, but not completed. The higher time frame players know this, so I'm assuming they are expecting that production in the US can ramp up quite quickly on those wells that have yet to be completed.

One thing to note is that short term wise a thing to note is crude oil inventories have decreased although analysts have expected that to increase.

My question to the CL gurus:
How do you think the market is going to react to the 50+ area? Do you think it'll continue to rally and break-out with combination of positive production cap news and positive inventory news? Or do you think higher time frame players will be looking at this area as a good place to exit any long positions expecting that this won't last very long?

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  #1673 (permalink)
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@CobblersAwls not trying to take away from the excellent work laid out above by @SMCJB

I came across this by Kam Dhadwar in a webinar put together by Peter Davies @DionysusToast

Though it may perhaps be of use

Introduction to Spread Trading

Free Market Profile Trading Videos ? TheTradingFramework.com | Market Profile Trading

-William

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  #1674 (permalink)
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SoftSoap View Post
...Also, nothing has been formalized and even if it was formalized, is there anything strongly in place right now that would prevent Saudi Arabia from just ignoring this come 2017?

Yes...Saudi Arabia's inability to survive a continued depression in oil prices. Forbes Welcome

There was a really great article last week somewhere about the Saudi plight and why they caved into Iran's demands, but cannot find it...Sorry. The above is a good primer.


Quoting 
My question to the CL gurus:
How do you think the market is going to react to the 50+ area? Do you think it'll continue to rally and break-out with combination of positive production cap news and positive inventory news? Or do you think higher time frame players will be looking at this area as a good place to exit any long positions expecting that this won't last very long?

There's gonna' be profit taking for sure I reckon', before the official meeting at end of November. Expect a wild ride until X-Mas.

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  #1675 (permalink)
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WilleeMac View Post
@CobblersAwls not trying to take away from the excellent work laid out above by @SMCJB

I came across this by Kam Dhadwar in a webinar put together by Peter Davies @DionysusToast

Though it may perhaps be of use

Introduction to Spread Trading

Free Market Profile Trading Videos ? TheTradingFramework.com | Market Profile Trading

-William

Very interesting video, agree with a lot/most of what was said. Definitely more of a 'what is' rather than a 'how to' but interesting none the less. Their idea of getting away from the more generic stuff and finding your own exotic combinations is something I would second. You won't get rich quickly, but you could find some very high percentage, very low risk trades.

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  #1676 (permalink)
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SoftSoap View Post
My question to the CL gurus:
How do you think the market is going to react to the 50+ area? Do you think it'll continue to rally and break-out with combination of positive production cap news and positive inventory news? Or do you think higher time frame players will be looking at this area as a good place to exit any long positions expecting that this won't last very long?

I don't trade flat price, and only track the fundamentals enough to have a high level knowledge of what is going on... that said US stocks peak in May, and normally drop until the end of September, and then build in October & November again, and as such the US tock draws aren't that surprising to me ... US production is about 1kkb below it's peak last year, and 500kkb below this time last year, BUT as crude prices rally production will increase. We are already seeing the Rig count rise (425 vs 316 May low). I still think there's a lot of pain in the US energy patch and every dollar makes a diference so I believe supply will return, and return quickly ... Producers are still lightly hedged for next year and the year after. Any rise in the curve will sold by producers. So all-in-all I think Crude, or at least US Crude/WTI will struggle to rally much further.

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  #1677 (permalink)
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SMCJB View Post
...So all-in-all I think Crude, or at least US Crude/WTI will struggle to rally much further.

I hope so SMC, I am in some CL shorts right now that are negative many many tics unrealized loss! Heck of a time for me to be doing what I am trying to do, but this is exactly what I asked for. *HEAVY SIGH*

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  #1678 (permalink)
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@SMCJB Thanks a lot for the in-depth write up, some extremely valuable information in there. Doug Huggins video series is fantastic. As for the ED reports, that was indeed the Joseph Choi series I was talking about.

For anyone interested, you can get part 2 and 3 here (http://www.cmegroup.com/education/files/curvature-trading-parttwo.pdf) and here (http://www.cmegroup.com/education/files/curvature-trading-part-three.pdf).


Thanks!

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Wall Street Journal - OPEC Deal Fails to Lift Oil Price Forecasts

... "A survey of 13 investment banks by The Wall Street Journal predicts that Brent crude, the international oil-price gauge, will average at $56 a barrel next year, down by more than a dollar from last month’s survey. The banks expect West Texas Intermediate, the U.S. oil gauge, to average $54 a barrel next year, also down a dollar from the previous survey."

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I'm following this guy as well as John Kemp on twitter

Lee Saks ‏@Lee_Saks 8m8 minutes ago

#Algeria | #oil minister Boutarfa thurs: even though we have no target, our target is $55. via @ArgusMediaOil. #OOTT

The point is, between the two they seem to be on top of the oil headlines (for free)

-William

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