The significance of the Transatlantic crude trade is growing, as highlighted by the scale of U.S. crude oil exports and the impact of the WTI Midland cargo inclusion on the Brent complex. CME Group offers a range of instruments allowing traders to hedge the volatile spread between WTI and Brent-related oil markets. Trading the Transatlantic Crude Spread on CME Group explores the use of WTI (CL), Brent (BZ) and WTI Houston (HTT) futures to lock in the price of a physical supply deal and to replicate the arb with liquid futures contract.

CME Group’s WTI-Brent Crude Oil Cross Month Spread Option (Exchange Code: BVX) provides a tool for managing the unique cross-month spread risk that arises from cargo transit time: loading or pricing a cargo in one month and selling it in a different month.    

In the sections below, we examine how the WTI-Brent Crude Oil Cross-Month Spread Option from CME Group may be used to manage risk and monetize opportunity around Transatlantic cargo movements.

BVX is a financially settled European-style option on the spread between the settlement price of WTI in one month, and the settlement price of Brent in the following month.  

For example, the BVXG24 is an option on the spread between February 2024 WTI and March 2024 Brent (CLG24-BZH24).  If CLG24 is trading at $78.50 and BZH24 is trading at $82.00, an at-the-money strike price for a BVXG24 put or call option would be -$3.50.  BVXG24 expires on January 19, 2024, one day before the CLG24 expiration.  

In this example, a trader has a term purchase of a 700K barrel U.S. Gulf Coast cargo, paying a WTI-based price for the month of loading.  Based on his assessment of freight and quality for the January cargo,  he believes he will earn a higher return by selling the cargo into Europe off a February Brent price if the January WTI/February Brent spread is -$4.00 or wider.  If the spread is narrower than -$4.00 he will resell the cargo locally off of a WTI price.    

To take advantage of his physical optionality on the cargo delivery, he decides to sell 700 January BVX (BVXF24) puts with a -$4.00 strike .  The trader collects the premium of $.75 or $525,000.   

On December 18:  

• Scenario A:  January WTI/February Brent spread (CLF24/BZG24) is -$5.00 per barrel
  • Since the spread is wider than -$4.00, the trader will sell the cargo into Europe and can lock in $1.00 of paper profit on the cargo or $700,000
  • Since the spread is $1.00 below the put strike price, the trader owes $1.00 or $700,000 on the option  
  • The trader keeps the $.75 or $525,000 in option premium

• Scenario B:  January WTI/February Brent spread (CLF24/BZG24) is -$2.75 per barrel
  • The option expires worthless
    
  • The trader sells the cargo into the domestic market
  • The trader keeps the $.75 or $525,000 in option premium  

In this example, the trader monetizes the optionality in the cargo by collecting a premium on the sale of the put.  If the spread narrows beyond -$4.00, the option expires worthless and the trader keeps the premium.  If the spread widens, the trader will owe money on his option but will offset the loss by physically buying crude off January WTI and delivering it to Europe for a February Brent-related sale. 

In this example, a European refiner buys a 700K barrel cargo of WTI Midland at a WTI-related price for January loading and February delivery into Europe.  The refiner’s European product sales are based off a February Brent price.  The January WTI/February Brent spread is trading at -$3.60.

The refiner wishes to buy insurance against the crude oil purchase being too expensive relative to the product sales (WTI-Brent narrowing). 

Refiner buys 700 BVXF24 calls with a strike of -$3.50, paying $.20 as insurance against the January WTI/February Brent spread narrowing.

On December 18:

• Scenario A:  January WTI/February Brent spread (CLF24-BZG24) is -$5.00 per barrel
  • The call option expires worthless since the spread is lower than the strike price
    
  • The refiner is able to lock in the price of his crude oil at $5.00 below February Brent
  • The net purchase expense for crude oil is -$4.80 under February Brent (-$5.00 net the $.20 call premium)
• Scenario B: January WTI/February Brent spread (CLF24-BZG24) is -$2.75 per barrel
  • Since the spread is .75 above the call strike price, the option pays out $.75 or $525,000
    
  • The refiner is able to lock in the price of WTI-based crude at -$2.75 below February Brent
  • The net purchase expense for crude oil February Brent -$3.30 (-$2.75 January WTI/February Brent less $.75 option payout plus $.20 option premium paid)

In this example, the refiner pays a premium to insure against the narrowing in the WTI-Brent spread.  If the spread widens, the refiner buys the January crude oil at a wider discount to February Brent, with the profit offsetting some of the premium.  If the spread narrows, the option pays out, helping to offset the higher relative cost of crude oil.

Hedging and trading opportunities for WTI-Brent risk on CME Group are numerous.  For more information about the products used above or other Transatlantic arb products, please refer to the list below or contact us at energy@cmegroup.com.

Trade CL/BZ intercommodity spreads for same month, plus 1-Month and 2-Month offset combinations