A lot of people are talking about the WTI / Brent spread being backwards lately. But the contract specifications for "Light Sweet Crude Oil (WTI)" as it is called, is now listed as 0.42% sulfur. Whereas true "WTI" is a much higher grade at 0.24% sulfur. In the past there was a premium for WTI over Brent due to the low sulfur content of WTI and other factors in the specification. However, now what the exchanges call "Light Sweet Crude Oil (WTI)" has a spec with much lower quality than true "WTI". It is normal that this "Light Sweet Crude Oil (WTI)" should trade at a discount to Brent since it is lower quality. Am I missing something, or is this part of the reason for the so called WTI / Brent spread being backwards recently?
Hi. You are right, WTI is supposed to be at a premium, but it's because of the build up of inventory of land locked WTI at the Cushing delivery point.
I know there are many other factors (such as build up at Cushing) driving down WTI in relation to Brent. However, historically you will see it explained that WTI is a superior grade to Brent and this causes an average $1 - $2 premium. What is now being sold on the exchange as "light sweet crude (WTI)" is not actual WTI - it is a much lower grade - lower even than Brent. This would naturally be part of the reason it is now selling at a discount to Brent. Am I missing something, or when did the exchange switch out "WTI" for "light sweet crude (WTI)" at a much lower grade?
I can't find the sulfur content any where on the CME's website. Can you post a link to where you found it, this it the first time I have heard this. Thanks 5yr
Yeah, they do a good job of burying it. First you will click on the specifications for "light sweet crude (WTI)" which takes you here: http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html But that document doesn't actually list the specs, instead to get the specs you will go to the bottom and click on "rulebook" which takes you here: http://www.cmegroup.com/rulebook/NYMEX/2/200.pdf It is listed on Page 3. You will notice that WTI (at 0.24% sulfur) can still be delivered to satisfy the contract, but they also allow much lower grades up to 0.42% sulfur.
There were news stories recently that Nymex is looking to make changes to the contract specification to limit the acceptable content. Apparently some suppliers have been mixing in lower content Canadian oil which is allowed by the current spec, but is causing problems for refiners. I am wondering if this is part of the reason for the widened spread. The spread seems to make no sense economically in the longer term as surely it does not take $13 to move the oil from Cushing to the coast?
By the way I've confirmed with CME that the spec is for 0.42% sulfur. No answer yet to my follow up question as to why they keep WTI in the contract name when it is no longer WTI grade, or when this change occurred. The worst part is that all the brokerages and traders continue to call this contract WTI and sell it as such. I can pretty well guarantee that no one would deliver WTI to satisfy this contract. It would be like delivering 24 carat gold when you only have to deliver 23 carat. The grade is now likely worth several thousand dollars less per contract than true WTI grade. Unless I'm missing something... there must be someone out there with more history on this.
Yes, but that is a separate issue. When I first heard that the spec had been changed, I found those news stories first and thought this was perhaps the problem. However, that issue is simply some secondary contaminants like Vanadium are being mixed in and NYMEX is considering tightening the spec. It is a totally different issue from why everyone is calling this contract WTI when the spec was apparently changed out from under us for a totally different lower grade of oil.
Just a final clarification. Apparently the spec for "light sweet crude (WTI)" has been at 0.42% sulfur for many years. The sulfur level of the oil delivered under this contract has also not changed much over the years according to COQA. So although CME should drop the misleading term WTI from the contract, this apparently is not a new issue which would change the spread trade fundamentals.