Starting Crude Oil and Coal Technical Analysis

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Dragunov

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Hi everyone.

I'm an electricity trader, and am responsible for five (5) 10MW diesel engines. My engines run on HFO, LFO, and Bunker fuel.

I would like to start "monitoring" the prices of crude oil in the global markets. Now, I only know a few fundamental indicators in reading and projecting crude prices, (i.e. cushing hub prices, US national reserves, European diesel demand) but since i don't have formal training in this, I'm just guessing like an amateur most of the time.

Is there an art to this? Is there a Technical Analysis method that I can use for Oil prices? My background is in physics and nuclear power, but I'm very much a newbie in the methods used in financial markets.

Please give me leads?
 
I second the motion. Sharing is the spirit of our community. If you have links to article, non copyrighted materials, do put up here. If it's a books people can buy, give a link.
 
Can anyone comment on the huge difference between the crude oil price at Cushing and North sea i.e., WTI and Brent. Wti is priced 12$ cheaper than brent ... I am surprised as Wti is a better type of crude.
 
Technically WTI should be priced higher than brent since WTI is lighter and sweeter and has a lower sulfur content than Brent.

WTI is the standard for US refineries. Brent has been the standard for Europe and Russia and parts of Asia. This has been changing recently and Brent has become the standard for basically every place other than USA. This shift in balance even though US is the worlds single largest user has made Brent sell at a premium to WTI.

Before, if Brent went even a few cents above WTI it was basically instant arbitrage. Brent will most likely soon replace WTI as a the global benchmark as the demand is shifting to Europe/Africa/Asia where Brent is considered in demand.

Supply/Demand basically at the end of the day.
 
when brent trades over wti, it is never an "arbitrage". the arb cannot be performed as wti cannot be shipped out of cushing (except to refineries in the midwest) to do the arb. historically, wti traded over brent, but there have been dislocations and wti eventually recovered. on the other hand, wti trading a lot over brent can be "arbed" as brent can be shipped to the US and then to cushing. in fact, brent is one of the oils you can deliver (albeit for a discount) if you are short the cl contract on nymex.


Joy Pathak said:
Technically WTI should be priced higher than brent since WTI is lighter and sweeter and has a lower sulfur content than Brent.

WTI is the standard for US refineries. Brent has been the standard for Europe and Russia and parts of Asia. This has been changing recently and Brent has become the standard for basically every place other than USA. This shift in balance even though US is the worlds single largest user has made Brent sell at a premium to WTI.

Before, if Brent went even a few cents above WTI it was basically instant arbitrage. Brent will most likely soon replace WTI as a the global benchmark as the demand is shifting to Europe/Africa/Asia where Brent is considered in demand.

Supply/Demand basically at the end of the day.
Click to expand...
 
latency said:
when brent trades over wti, it is never an "arbitrage". the arb cannot be performed as wti cannot be shipped out of cushing (except to refineries in the midwest) to do the arb. historically, wti traded over brent, but there have been dislocations and wti eventually recovered. on the other hand, wti trading a lot over brent can be "arbed" as brent can be shipped to the US and then to cushing. in fact, brent is one of the oils you can deliver (albeit for a discount) if you are short the cl contract on nymex.
Click to expand...

Huh? How is something that is suppose to be cheaper by definition is priced higher not considered arbitrage? I guess we have seperate definitions of arbitrage.

Guys, since there seems to be such a demand, I will make a Blog post some oil related information and lots of references. I will have my friend add to it. He was a Commodity trader/MD at BOA/ML. He will be able to contribute better than me.
 
Hi, I am glad to have generated this amount of response.

With regards to the WTI-Brent Divergence,

I find this a very eye-opening reading:

The Increasing Divergence of WTI Pricing from World Markets

Basically it says that the whole problem is due to a combination of pipeline bottlenecks and storage capacity issues in Cushing, Oklahoma.
They call the phenomenon the "Cushing Cushion". Now, due to Cushing being the world's largest storage of crude oil, it affects the WTI immensely. Hence, WTI is only a benchmark for Cushing, Oklahoma, and not the World. Platts suggested some alternatives to the WTI in the reading. I hope you like it.

Back to my original topic though, I've been looking around the net,
and found a book by Samuel Van Vactor "Introduction to the Global Oil and Gas Business". I'm looking at chapter 3 "Oil Pricing". I'm such an amateur in this ::wall
 
Joy Pathak said:
Huh? How is something that is suppose to be cheaper by definition is priced higher not considered arbitrage? I guess we have seperate definitions of arbitrage.
Click to expand...
If you agree to give me a vanilla milkshake and if I agree you to give a chocolate milkshake (and chocolate > vanilla), but the only place you can buy vanilla is out in Russia and customs won't let you ship vanilla, then it's not an arb, it's called defaulting.
 
Yike Lu said:
If you agree to give me a vanilla milkshake and if I agree you to give a chocolate milkshake (and chocolate > vanilla), but the only place you can buy vanilla is out in Russia and customs won't let you ship vanilla, then it's not an arb, it's called defaulting.
Click to expand...

That is not similar to the argument of why it USED to be an arb when Brent sold at a premium to WTI. Things like pipeline issues in Nigeria used to cause Brent to be priced at a premium to WTI.

What you just stated is a supply constraint. That is not the same reasoning of WTI vs Brent. Brent and WTI used to have everything similar and the pure content of WTI caused it to be sold at a premium and it was very common among firms to short brent when Brent crossed WTI. Mostly spread traders though.

I think now Brent is always going to be a premium to WTI for the reasons stated in the articles and what I mentioned before. There will be an opportunity to set up a trade if the spread reduces too much.
 
haha, rookie mistakes, buy the cheaper one, sell the expensive one, if only...

first, just because it is cheaper doesnt mean its an arb (you also have to account for shipping costs etc). if wti is cheaper than brent, for one to perform the arb, one needs to buy wti, ship it to europe and sell it against brent. however, wti cannot be shipped outside cushing given the pipeline structure. crude can flow into cushing from multiple directions but the pipelines going out are only to the midwest. as a result this arb cannot be performed.

on the other hand, if wti trades a lot over brent, brent since its not a landlocked crude like wti, can be shipped over to the us gulf, then through pipelines to cushing. therefore, wti cannot trade a lot more than shipping costs+20 cents(the nymex discount)

traders look at other spreads too and one interesting one to look at is the LLS/WTI. LLS is the crude which is most used in refineries in the gulf coast(the center of US refining) and this can be arbed against brent. currently, this spread is also at historical levels to wti.

Joy Pathak said:
Huh? How is something that is suppose to be cheaper by definition is priced higher not considered arbitrage? I guess we have seperate definitions of arbitrage.

Guys, since there seems to be such a demand, I will make a Blog post some oil related information and lots of references. I will have my friend add to it. He was a Commodity trader/MD at BOA/ML. He will be able to contribute better than me.
Click to expand...
 
To continue my topic,

Here are the following steps I plan to take in the next few days to better grasp the mechanics of Oil pricing:

1) Take daily values of WTI, Brent from bloomberg (i dont have an application for this so i'll use their website)
2) Make a mysql database where I could store it (besides excel worksheet)
3) read on more books on modeling/TA
4) try to fit some curves and use R project's forecast package.

Does that sound okay?
 
you will need to account for rolling of the front month contracts, wti expires around 21 of every month, brent around the 15th.

Dragunov said:
To continue my topic,

Here are the following steps I plan to take in the next few days to better grasp the mechanics of Oil pricing:

1) Take daily values of WTI, Brent from bloomberg (i dont have an application for this so i'll use their website)
2) Make a mysql database where I could store it (besides excel worksheet)
3) read on more books on modeling/TA
4) try to fit some curves and use R project's forecast package.

Does that sound okay?
Click to expand...
 
latency said:
haha, rookie mistakes, buy the cheaper one, sell the expensive one, if only...
Click to expand...

What are you talking about? That is exactly what you do. You have to keep it simple. It's making things complicated is what is causing people to lose so much money. As the manager at the hedge fund I do work at always says... K.I.S.S. ;) ... ok maybe he doesnt say the last S.
 

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