Big bets on the convergence of two leading crude benchmarks this week have left oil traders scrambling to decipher its meaning, breathing life into an otherwise tiny corner of energy derivatives markets.
Volumes have surged in options that will pay out if the price of West Texas Intermediate crude, the US benchmark, catches up with international counterpart Brent crude two years from now.
Industry executives contacted by the Financial Times did not know who had bought the options, but guessed that the impetus was a possible change in US tax policy.
Republicans in the House of Representatives have supported a tax on US imports as part of a broader reform of the tax code. Oil traders believed the tax, if enacted, could encourage refiners to use more domestically produced crude oil and less foreign oil. About half of US crude supplies are imported.
On Monday and Tuesday, 37,200 options that pay out if the WTI-Brent spread closes by December 2018 changed hands, according to data from CME Group, the exchange operator. The deals increased open interest, or the number of contracts outstanding, from zero to 35,050. Preliminary data showed another 4,250 of the options were traded on Wednesday.
The deals pushed total volumes in the options well above any other day this year.
“It’s a really big trade,” said an oil markets analyst. “Everybody was going, why would anyone do this? The talk was, it has to do with taxation.”
A broker who watched the deals as they were reported said they bore the hallmarks of hedging by a pipeline company that could suffer if a change in historical oil price relationships redirected flows of crude. Hedge funds typically don’t take big risks on contracts that pay out in the distant future, as they can be volatile and thinly traded.
WTI traditionally traded at a premium to Brent, reflecting the US’s status as a net oil importer. The US benchmark then suffered a sharp discount as shale production caused a domestic glut. Since a ban on US crude oil exports was lifted at the end of last year, the discount has narrowed.
On Wednesday, December 2018 WTI futures closed at $54.30 a barrel, while December 2018 Brent ended the day at $56.15 a barrel.
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