Points to lack of depth in the commodity futures market

Pratim Ranjan Bose

Crude reality

Lack of

liquidity makes investments in

Brent futures

on NCDEX a risky proposition

Sept contract

selling at $ 1.25/ barrel higher than the sweeter crude at Nymex

Kolkata, Aug. 11

The current trend of Brent crude selling at a premium over WTI (West Texas Intermediate) yet again points to the lack of depth in commodity futures market in the country.

While global investors are utilising the spread arbitrage opportunity, in India, trading still revolves around WTI linked futures on MCX.

There is hardly any trading at Brent futures on MCX. Though trading takes place on NCDEX, volumes continue to be extremely low without much signs of improvement in liquidity.

According to Kotak CSL Research, lack of liquidity, in turn, makes investment in Brent futures on NCDEX a risky proposition.

Price aberrations

Having begun with a 38 cents a barrel differential early this month, the September contract of Brent is now selling at $1.25 a barrel higher than the sweeter WTI crude at Nymex.

This is a reversal of the normal trend whereby WTI stays in a premium of $1-2 over Brent.

Considered to be the sweetest crude with least sulphur content, WTI is available and used only in the US and is considered to be the main price benchmark of crude oil. Brent on the other hand, is used in varying degrees in the rest of the world, especially in Europe.

Investment strategy

Price aberrations have reportedly taken place owing to supply constraints of Brent, primarily due to disruptions in Nigeria and Russia and the geo-political risks concerning West Asia supplies.

"No one knows how long Brent will sell at a premium. One can only expect that this aberrations would not last long," according to a senior official connected with international trade of Bharat Petroleum Corporation Ltd, which has a risk management desk in place.

There is, however, a widespread expectation that considering the freight factor in view, the reverse spread between Brent and WTI would not exceed $2.

Investors should go short on Brent and take long positions in WTI, feels Mr Vivek Bajaj of Mars Comtrade.

PFC Energy, a leading US-based energy consultant, expects the prevailing price aberration to be short-lived. "We expect the situation to continue not more than a couple of weeks," a company analyst told

Business Line.

According to him, such aberrations are periodical and take place on geo-political disturbances. Earlier, Brent ruled higher than WTI in February this year.

Kotak CSL Research predicts that the premium on Brent will end with the West Asian crisis. "We are expecting crude oil prices (WTI) to touch $82 by November.

Thus, one can take long positions in the farthest month contract and expect Brent prices to appreciate at least by $5-6 from the current levels," it is pointed out.

(This article was published in the Business Line print edition dated August 12, 2006)
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