Business
20:08, 15-Jul-2018
US oil boom delivers surprise for traders – and it's costly
Updated
19:47, 18-Jul-2018
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The world’s biggest oil traders are counting hefty losses after a surprise doubling in the price discount of US light crude to benchmark Brent WTCLc1-LCOc1 in just a month, as surging US production upends the market.
Trading desks of oil major BP and merchants Vitol, Gunvor and Trafigura have recorded losses in the tens of millions of US dollars each as a result of the “whipsaw” move when the spread reached more than 11.50 US dollars a barrel in June, insiders familiar with their performance told Reuters.
The sources did not give precise figures for the losses, but they said they were enough for Gunvor and BP to fire at least one trader each.
The companies declined to comment, and none of them publish details of their individual trading books.
It highlights the challenges of trading in WTI futures CLc1, the benchmark for US crude when US pipeline and storage infrastructure struggles to keep pace with surging shale output that has lifted the US above Saudi Arabia to become the world’s second-biggest crude producer behind Russia.
“As the exporter of US crude, traders are naturally long WTI and hedge their bets by shorting Brent. When the spreads widen so wildly, you lose money,” said a top executive with one of the four trading firms.
The discount of WTI to Brent hit 11.57 US dollars a barrel on June 6, the widest in more than three years, as US output surged to record highs and surpassed pipeline capacity as traders rushed to export. The discount had been about five US dollars just a month before.
Betting on the price spread, a popular trade in oil markets is based on predictions of price differences between European and US market fundamentals.
Source(s): Reuters