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Crude Prices: Is the Brent-WTI Spread Unwinding?

Thursday, 17 Feb 2011 | 6:39 PM ET

Mideast tensions are growing. Technical levels are being breached. And there’s a long weekend ahead. All reasons for traders to cover short positions on oversold oil futures and take profits on positions that have skyrocketed over the past few weeks.

Witness the change in the oil price spread, which has been the biggest momentum trade in the crude market for the past few months. Some traders are calling it “a major unwind” of the Brent-WTI spread.

Indeed, April North Sea Brent crude futures fell to below $103 a barrel Thursday, while March WTI futures, which are set to expire on Tuesday, rose $1.50 to a session high of $86.50 a barrel. The April Nymex crude contract also gained more than $1 to trade above $89 a barrel. The spread collapsed from $16 to less than $14 in a few hours.

But there are several factors at work here.

Technically, U.S. oil prices may have become oversold. Today’s rally in U.S. oil prices may have been sparked by concerns over protests in Yemen, Libya and Bahrain, as well as questions over the intent of Iranian warships scheduled to head to the Suez Canal. But the rally extended to the highest price in a week as the March contract rose above the 100-day moving average, a key technical level. Also that contract expires on Tuesday and some traders may have been anxious to cover positions ahead of the long weekend.

Tight oil inventories in the North Sea and the concern about supply disruptions from the Middle East has caused Brent crude prices to rally to above $100 a barrel, staying there for nearly two weeks. Meanwhile, surging oil flows into the middle of the U.S. from Canada have hit bottlenecks at burgeoning storage facilities in Cushing, Oklahoma, the key delivery point for NYMEX, which has pressured U.S. oil prices. Brent crude prices have rallied over 6 percent since the riots erupted in Cairo at the end of January, but U.S. oil prices have fallen 1 percent in that time.

Playing the Brent-WTI spread has been the name of the game in the oil market for weeks. Traders and investors have increasingly been looking to buy the thinly traded Brent Crude Oil ETF and short the U.S. Oil Fund , the Goliath oil ETF that reflects the WTI price. Others just buy the U.S. Short Oil Fund ETF to short WTI futures. It’s a trade that has fared well for weeks.

The spread has come in bit today, but with political uncertainty looming in the Middle East and North Africa and a long weekend in which literally anything could happen, let’s see how long traders want to continue taking profits in any oil contract.

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