A Simple Spread in Crude Oil

Here is an interesting pattern in Crude Oil calendar spreads. The recent sell off in Crude was sharp and violent and suggested bear spreads (short near month, long far deferred) would benefit. Interestingly, bear spread took a long time to react, almost as if it was waiting for the market to hold lower levels before playing catch up.

Firstly, check out the move in July Crude:

And we saw pretty much the same move in Dec Crude:

Now for the spread between July and Dec. After the individual contracts fell about $15 in three days, you’d expect a decent move. The July-Dec spread went from about -30 cents to -$1.00, but almost immediately retraced back to -66 cents.

Despite the big fall, the spread didn’t do too much. What is interesting here is the subsequent movement. As the underlying contracts have been volatile but pretty much sideways since that big move, the bear spread continued to drop. As at 24th May, it has traded as low at -$1.73.

Given the spread gave you a chance to jump in at -66 cents AFTER the big move, a subsequent drop of over $1.00 is a fantastic move that happened in slow motion. As mentioned above, it is almost as if spreader were waiting for the underlying market to hold lower levels before playing catch up.

This combined with a bearish seasonal pattern in the spread made the trade a no-brainer.

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