Goldman Presents Three Scenarios For Where The WTI-Brent Spread Is Headed (And Why The Firm Has Been Wrong So Far)

Tyler Durden's picture

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mickeyman's picture

Isn't this like when Goldman experts forecast oil would run to $200/bbl back in 2008, and they got their clients in long oil near the peak, then made a nice profit taking the other side of the trade.

Do you listen to your broker?

malikai's picture

I listen to my broker. Then I wait a bit and go and do the opposite. Works pretty well.

mickeyman's picture


A friend of mine had a broker he used to call "The Great White Shark". His advice was perfect, provided you did the opposite of what he suggested.

malikai's picture

I have two equities accounts, one of them is really small, basically my sucker account. I use that to trade broker's reccomendations with. It loses money constantly and I'm always having to put cash in it. Its with a TBTF and this is the broker I listen to. I trade small lots of their reccomendations so as to keep the information flowing and have a "I'm the sucker" relationship with.

My other account is the inverse of the first account. It's with a small po-dunk broker who is equally trying to sell me bullshit, but I don't trade their reccomendations at all. With that account I do the inverse trades as with my TBTF account. So far this year, returns are ~+50% on my real account and ~-15% on the TBTF account. I write off the 15% loss as payment for all the good info those chumps give me. With this system, I am actually upset when the TBTF throw me a bone every once in a while and give me a good hint.

What else can you do in this circus other than put on the clown suit and play the organ?

lizzy36's picture

Amusing that x-goldman trader, now head of JPM's oil trading desk was responsible for $38M in Q1.

J.P. Morgan's oil desk has been an important factor in the success of the bank's commodities business. The desk is run by Jeffrey Frase—a former Goldman Sachs trader for 17 years who jumped to Lehman Brothers Inc. in 2007, the year before it failed—to run its oil desk.

Lehman went under in September 2008, and Mr. Frase joined J.P. Morgan in October 2008. He is known in the oil-trading community as a "sustainable earner," said one person familiar with J.P. Morgan's commodities group.

A J.P. Morgan spokeswoman said Mr. Frase declined to comment.

Some notable trades that worked well for Mr. Frase's group in the first quarter included one on the widening spread between Brent and Nymex crude oil—the two benchmark prices—which helped return about $38 million in the first quarter. J.P. Morgan also made money on fuel oil and Asian oil markets, according to people familiar with the matter.

malikai's picture

A very interesting read indeed. I like how they give you three different scenarios to bait with. Those guys are kinda smartly.

SheepDog-One's picture

WTI to Brent spread $20, and WTI is only thousands of barrels per day. I dont see any correlation at all its nonsense.

CrashisOptimistic's picture

It is largely nonsense.  Oil analysts exist to generate more money under management.  Not to make trading profits. 

But a pseudo-sophisticated analysis that is carefully structured to avoid any suggestion of something that would cause clients, or more specifically, potential clients to keep their money in savings accounts has value  to the firm as a money attractant and so analyst salaries are paid.

Brent is higher than WTI because it is more valuable.  It is more valuable because 9.1% unemployment in the US has reduced demand for WTI.

There are, at present, rail cars that are being leased and filled with Cushing oil and sent to the Gulf Coast refineries.  The cost of shipping is $6.  When they arrive at the refinery, the price quoted by the entrepreneuer to that refinery is Brent minus $1.

The Cushing theory was meaningful at the beginning of all this.  No longer.

Iconoclast's picture

fwiw I suspect OIL will hit 200 a barrel inside two years irrespective of the state of the global economy once the truth about oil reserves can no longer be surpressed...China recently and quietly surpassed the USA as the biggest energy consumer and they haven't even revved up their engine yet.. 

Cassandra Syndrome's picture

Maybe its because Brent is backed up by more physical quantities than WTI, too many paper & electronic trades with WTI artificially increasing notional quantity and reducing the price?

Flakmeister's picture

Reposted from an earlier thread:

Learnt something recently that helps explain the WTI Brent spread...

The definition of WTI is based on API specific gravity and Sulfur content. I presume that people understand what "condensate" and "wet gas" are. Condensate production is rising as it is a by product of the shale NG plays (in fact the production of the shale NG is focused on those areas that are wet). Now, the pipeline guys are blending Alberta Tar sand syn-crude with light sweet condensate to satisfy the WTI requirements. The catch is that this blend is a poor substitute for real WTI (from the Permian Basin). When you analyze the refining yields, the blended stuff comes up short....

Call it the hedonistic adjustment to the quality of crude oil....almost forgot, there was a time (quite recent) when pipelines would never blend products of different quality...

r101958's picture

Good points Flak. One must also ask.........why are they blending product if there is plenty of regular light sweet getting produced?

Flakmeister's picture

I don't follow... the real question is what fraction of the flow into Cushing is real light sweet? As I pointed out earlier, I would be mighty pissed if I was a producer of real light sweet and captive to a Cushing delivery...

r101958's picture

put another way....they most likely started blending last year in August when the difference between Brent and WTI really began. So, why did they start blending? That question, most likely, will never be answered with any clarity. Maybe price supression and/or inability to produce the real thing? One may also ask 'why was the legal amount of ethanol added to fuel raised from 10% to 15%'? Perhaps because it reduces oil used for gas by 400k brl/day. It also allows masking of the price of gas by hiding some of those costs in gov't ethanol subsidies (and ethanol ends up being at least as expensive as fuel created with oil--but with part of the price hidden).

malikai's picture

I'd just put the ethanol subsidy simply on the power of the agri lobby in DC. As we all know it only costs a few million to buy off enough senators to get a bill like that through. And of course it doesn't hurt that ethanol is viewed as being "green".. LOL

As for the mixing of condensate to satisfy the API gravity in syncrude; it sounds plausible. But syncrude is more expensive to produce than most light sweets, so I don't get the point of flooding the market with more expensive oil and depressing the prices.. I just can't connect that.

Keystone XL went online early this year, sending loads of syncrude to cushing, just about the same time the February jump in the spread kicked off.

I'd venture to say that all of this is a simple set of fundamentals being used and abused by the Goldmans and JPMs in order to liberate a few traders of their money. I'm sure their prop desks are getting some good numbers out of this game.

Flakmeister's picture

My old link giving all the crude prices doesn't work I can't find the spread. My understanding is the blending is being done with condensate. IIRC, the syncrude is API 32, a 20% or so cut with condensate gives you a blend that satisfies WTI.... Typically condensate was used as feedstock for plastics and production is up because of the "wet gas" plays...

Hard to draw conclusions given the dearth of good data....

malikai's picture

I wonder what they do with the sulphor. I understand syncrude is a bit sour as well. That's got to add to the cost.

As far as the BRN/WTI spread goes. Looks like eyes are on the spread now and it's beginning its retreat from a peak ratio of 1.222.

CrashisOptimistic's picture

Ethanol does not have the same BTUs of energy content that crude does.  Keep increasing its proportion and we will soon see mileage on cars fall, and get noticed.

CrashisOptimistic's picture

Clarifying what Flak said above, a lot of "oil production" being ballyhooed as a by product of shale gas drilling is not oil.  It is wet gas or condensate.

This stuff does not contain 5.8 million BTUs per barrel.  You can't get the same number of gallons of gasoline from a barrel of it as you can from a barrel of oil.

Barrels of "oil" from these sources are being quoted as additive to barrels of actual crude and they are not.

It's all bogus.  You have to understand the industry.  Drillers and explorers depend on investment money.  They persuade investors to give them that money to drill via the use of hype.  Reports of declining oil production are not supportive of that hype and so enormous efforts are made to manufacture oil production numbers.

We're about to see it from KSA's Vanadium laced Manifa oil field.  It is heavy sour with a lot of vanadium in it (which corrodes the tanks and pipes of a refinery).  It is so bad that KSA is building their own refineries for that oil and will sell the output, funding the cost of corrosion of tanks and pipes themselves.

This is not the world where a drill could go down a thousand feet in Ghawar and produce a 30 year gusher.  It's just not, and it never will be again.

r101958's picture

Brent is the 'real' oil price. WTI is next to meaningless in the world oil picture. Watch RBOB gas as it trends with Brent prices. That will tell the story. Seems to me that WTI is, more than anything else, serving a political purpose; to make it appear, to the 'unedgumicated', as if oil prices are really still below $100.