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Blended whiskey meets blended crude

February 8, 2011

American v. London Crude Price

An interesting oil trade reminds Rocky of the song “America” from West Side Story (the Broadway show): “I like to be in America!  OK by me in America!, Everthing free in America! For a small fee in America!”

Rocky notes the price of WTI crude oil in America is at a record discount ($15/barrel) to London’s “Brent”  Crude Oil —  even though the London oil is worth slightly less to refiners. Oil’s not  yet “free in America,” but 17% is a remarkable discount.

Some  production problems in the North Sea and an inventory overhang in Cushing, Oklahoma explain  this discrepancy. Since America imports crude oil, Rocky believes it’s just a matter of time before cargos get diverted  from the USA to Europe, and this price spread collapses. Hence, Rocky is slowly buying crude oil futures in America, and shorting crude oil futures in London.

If the spread doesn’t collapse in the next few months, Rocky’s Plan B is to fill his many empty Scotch Whiskey bottles with crude oil and “deliver”  the recycled bottles to London…(which will also force the aribitrage to close.)  Of course he’ll have to convince airport security screeners that  the duty-free bottles of crude oil don’t pose an in-flight threat, and will explain that instead of a blended whiskey, it’s the  “Brent blend.”  He’s also prepared to hear  the TSA Agent recite Anita’s words from West Side Story: “I know a boat you can get on.” See: VLCC.

[Disclosure: Rocky never gives investment advice, and these sorts of trades entail considerable risk not to mention a nasty hangover.  Nonetheless, this trade is a “Rocky V.”  (See “definitions”  tab at the top of this page.)]

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