US oil boom delivers surprise for traders and it is costly
LONDON/ NEW YORK: 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 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 dollars each as a result of the ‘whipsaw’ move when the spread reached more than US$ 11.50 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, 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 US$ 11.57 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 US$ 5 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.
The jump in US output, now almost 11 million barrels per day ( bpd) from below five million bpd a decade ago, has upended the spread. Until 2010, US crude mostly traded at a premium to Brent. — Reuters