Business Daily from THE HINDU group of publications
Saturday, Aug 12, 2006

Cross Currency

Group Sites

Agri-Biz & Commodities - Commodity Exchanges
Industry & Economy - Petroleum
Brent crude commands premium over WTI

Pratim Ranjan Bose

Points to lack of depth in the commodity futures market

Crude reality
Lack of liquidity makes investments in
Brent futures on NCDEX a risky proposition
Sept contract selling at $ 1.25/ barrel higher than the sweeter crude at Nymex

Kolkata , Aug. 11

The current trend of Brent crude selling at a premium over WTI (West Texas Intermediate) yet again points to the lack of depth in commodity futures market in the country.

While global investors are utilising the spread arbitrage opportunity, in India, trading still revolves around WTI linked futures on MCX.

There is hardly any trading at Brent futures on MCX. Though trading takes place on NCDEX, volumes continue to be extremely low without much signs of improvement in liquidity.

According to Kotak CSL Research, lack of liquidity, in turn, makes investment in Brent futures on NCDEX a risky proposition.

Price aberrations

Having begun with a 38 cents a barrel differential early this month, the September contract of Brent is now selling at $1.25 a barrel higher than the sweeter WTI crude at Nymex.

This is a reversal of the normal trend whereby WTI stays in a premium of $1-2 over Brent.

Considered to be the sweetest crude with least sulphur content, WTI is available and used only in the US and is considered to be the main price benchmark of crude oil. Brent on the other hand, is used in varying degrees in the rest of the world, especially in Europe.

Investment strategy

Price aberrations have reportedly taken place owing to supply constraints of Brent, primarily due to disruptions in Nigeria and Russia and the geo-political risks concerning West Asia supplies.

"No one knows how long Brent will sell at a premium. One can only expect that this aberrations would not last long," according to a senior official connected with international trade of Bharat Petroleum Corporation Ltd, which has a risk management desk in place.

There is, however, a widespread expectation that considering the freight factor in view, the reverse spread between Brent and WTI would not exceed $2.

Investors should go short on Brent and take long positions in WTI, feels Mr Vivek Bajaj of Mars Comtrade.

PFC Energy, a leading US-based energy consultant, expects the prevailing price aberration to be short-lived. "We expect the situation to continue not more than a couple of weeks," a company analyst told Business Line. According to him, such aberrations are periodical and take place on geo-political disturbances. Earlier, Brent ruled higher than WTI in February this year.

Kotak CSL Research predicts that the premium on Brent will end with the West Asian crisis. "We are expecting crude oil prices (WTI) to touch $82 by November.

Thus, one can take long positions in the farthest month contract and expect Brent prices to appreciate at least by $5-6 from the current levels," it is pointed out.

More Stories on : Commodity Exchanges | Petroleum

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Automated peeling machine — A solution to sago, starch-making sector

Brent crude commands premium over WTI
Bay system may remain stationary
Marginal dip in inflation on lower food prices
Commodities drive ocean freight rates sharply up
Customs duty on palm group of oils cut
Rubber recovers on short supply
Facing resistance
Gasohol programme may come to a halt in South
Selling pressure on dollar to help gold
Uncertainty in copper market over mine stir
`Metal industry needs trained resources'
Kurien calls for resolution of GCMMF, union spat
Egg processors seek 5 pc export incentive
Pepper futures fall
80 per cent subsidy on farm pumpsets in AP

The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2006, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line