According to the news report by Reuters, the biggest oil traders in the world are now counting massive losses after the price discount of the American light crude to the global benchmark doubled in the last one month thanks to the soaring US oil production.
According to insider sources, trading desks of oil merchants Vitol, Trafigura, Gunvor as well as oil giant BP all recorded losses going up to the tens of millions. This was caused by the sudden whipsaw movement of US oil prices which led to the spread between the benchmarks going to $11.50 per barrel in the month of June.
These sources told Reuters that while they did not know the exact amount of losses, they were severe enough that BP and Gunvor each fired a trader. BP, it seems, not only fired one trader but also reshuffled two others internally. The report was not confirmed by the companies as they declined to comment.
This loss underlines the difficulty in trading in the West Texas Intermediate (WTI) futures with the US pipeline and storage infra struggles to keep up with the skyrocketing shale outputs. The massively increased output has taken the US to second place in global oil production ranking, overtaking even Saudi Arabia in the process. Russia still remains the number one oil producer in the world – for the time being.
According to a top executive from one of the four major trading houses, traders tend to long WTI and hedge their bets by shorting the Brent. However, when the spread between the two benchmarks widens so suddenly and wildly, traders will lose money.
The discount of the WTI against the Brent Crude benchmark went up to $11.57 per barrel on June 6, which is the widest it has been in more than three years. This happened as the US shale oil production reached record highs and forced traders to export as fast as possible as it crossed the capacity of the pipelines to hold that much oil. Just a month ago in May, the spread was only $5 wide.
Betting on the spread between the two benchmarks has been a popular trade in the markets and is based on the forecasts of what the price differences would be between the two markets.
US output has jumped up to almost 11 million barrels per day, which is a massive jump from just 10 years ago, when output was at an average of 5 million barrels per day. Till 2010, the WTI usually traded to the Brent at a premium. However, now that US oil production is surging, the benchmark has reversed course and is trading at a discount to the Brent.
However, such huge swings are not common, so when they happen, they always lead to trade casualties and so have earned the nickname “widowmaker”. Since that massive surge in the gap between the two benchmarks, the spread has narrowed sharply again.
This closing of the spread was due to the rise in the West Texas Intermediate prices because of an unforeseen outage at the Canadian oil sands site of Syncrude oil. This site produces up to 360,000 barrels of crude per day.
Inventories last week dropped due to this outage at the Cushing delivery point and consequently, the price of the US crude futures dropped to the lowest since December 2014.
This kind of volatility is only one of the problems that has plagued the US crude market in this first half of 2018. Another big issue that oil producers are facing is, as said before, the inability of the pipelines to cope with the volumes at this stage.