[Bulk Commodities] Crude oil just crashed — is there an arbitrage opportunity?
I put on a few short arbitrage positions in chemicals over the past couple of days, and this time it got a little dicey.
I'd expected crude to fall for a while, so I'd already taken profit on my earlier long-spread (cash-and-carry) trades and flipped to the reverse spread. But it didn't go the way I expected — the near-month spreads in plastics, methanol, and other products closely tied to crude kept grinding upward and just wouldn't drop.
Luckily today I got out with a small profit after a scare. Several chemical products hit limit-down today, so my floating loss finally turned into a small gain, and since it went beyond what I expected I bailed out decisively.
A lot of people have probably been watching the US-Iran conflict and crude prices lately. Crude has kept falling, partly due to the midterm election losses and so on.
But I trade spreads, so I could only watch this drop from the sidelines.
Chemicals followed crude down too.
Anyone watching closely would notice that the January contract fell the most.
That means shorting the near-month reverse spread didn't fall at all — it actually broke to a new high, and I nearly took a nasty hit.
As for why the January contract fell the most — that's also why I decisively exited with a small profit today.
Personally I think the market is pricing in an expectation of crude supply being released, and that expectation doesn't apply to the near month that's about to be delivered, nor to the far month, but to January.
Even though crude has fallen this much, the Strait of Hormuz actually hasn't opened up yet.
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