From the October 2013 issue of Futures Magazine • Subscribe!

Got volatility? Use OTC markets as a guide to arbitrage

Both gravity and sulfur content are dynamic and will fluctuate over time as a given stream or blend of crude oils changes in origin, reservoir depth and quality. Crudes that are low in sulfur are considered “sweet,” while high sulfur crudes are termed “sour.” High gravities (>39) are considered light while low gravities (<25) are considered heavy; midrange are considered intermediate or medium (see “Inside crude,” below). 

The sulfur content and gravities of crude oil imply a price relationship similar to that of fuel oil. Coupled with this inherent implied value, relative premiums and discounts also are influenced by regional supply and demand factors, product seasonality, refinery margins and run rates, geopolitics, tonnage capacity and many other variables.   

This year has seen unprecedented uncertainty and turmoil in the global crude oil markets. Libya declared force majeure from its Es Sider (As Sidr), Ras Lanuf, Zueitina and El Brega ports covering the country’s crude and product exports. Crude exports are down roughly 90% from 2011 levels according to Reuters analysis and labor issues continue to affect one of the most important grades entering the Mediterranean. On Aug. 26, the Libyan military declared they will “strike and destroy…any oil tanker” attempting to load cargo that was not under contractual agreement with the national oil company.  

The military “coup” in Egypt has brought the Suez Canal into play. While traffic flows through the canal have been uninhibited so far, the prospect remains that the canal may close temporarily or indefinitely. Closing the canal would alter tanker trade routes, requiring tankers to take the longer West-bound route around the Cape of Good Hope, thus extending their time in transit and decreasing available capacity on the market. The canal has closed before and is within the realm of closing again.

Tensions in Syria and by proxy, Iran, could potentially bring the Strait of Hormuz back into flux as well. History has proven Iran both capable and willing to attack commercial freight and mine traffic lanes in the Persian Gulf and the extremely vulnerable and narrow Strait of Hormuz. 

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