This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
I have been hearing some interesting conversations on the subway lately from some want-to-be financial analysts (yes I am eaves dropping again). Oil is a common theme in these conversations, but most of the time both people involved in the conversation were quite confused about the price of oil without actually realizing their error. I think the confusion is coming from not understanding that there are two common prices quoted: West Texas Intermediate (WTI) and Brent Crude. WTI is the oil from North America. Brent is the oil from the North Sea. Most of the time, when you see the price of oil quoted in Canada, it is WTI. In theory, these two should trade relatively close in price. In reality, Brent Crude has been trading at a huge premium to WTI for a while now. Brent has been trading around $125 US a barrel and WTI around $105 US a barrel. That is a large gap. Overtime, they should start to close the gap. Currently, most market participants predict Brent will fall in price to meet up with WTI and do not predict that WTI will rise to the levels of Brent.
WTI and Brent are not exactly the same type of oil, but they are a very similar product compared to most oil products traded. What this mini oil lesson points out, is that you need to sometimes go a bit deeper into your chart or price analysis than you might initially think to understand the dynamics of a particular area of trading. All oil traded is not the same and comparing a WTI chart to a Brent chart without noticing they are two different things, will never lead you to an educated opinion. To review and analyze a price quote or chart, you first must understand what you are looking at it. The basics of oil pricing are simple supply and demand (often mixed in with a healthy dose of fear on either side) but to do so effectively does take some background knowledge and a bit of research. It is not hard, generally very interesting, and it is a step not to be missed.