Brent Crude Oil Futures To Rollover Well In Advance Of WTI Crude Oil Futures Starting This Week -- January 26, 2016

Updates

March 21, 2016: RBN Energy has a great post on the expiration calendar for Brent. More in-depth notes here. 

Later January 31, 2016: moving one of the comments up here so it can be googled:  

Brent seems to be rolling to April today (January 29, 2015); they're now quoting prices for the CBJ contract, where J is April: http://www.nasdaq.com/markets/crude-oil-brent.aspx.  

WTI is still trading March (CLH): http://www.nasdaq.com/markets/crude-oil.aspx.

They must have a lot of oil in the small cubicles in those NYC skyscrapers, because they trade over a billion barrels of oil a day...see volume on top of the WTI chart; 1,340,572 contracts for 1000 barrels each changed hands today alone.

Later, January 26, 2016: a reader posted this comment, which I brought up here so that it is google-searchable (see comments below):

I caught the rollover on WTI last week. On Wednesday, as trading in the February contract for US crude was expiring, that price fell nearly 7% to close at $27.55 a barrel. Manwhile, while trading in February futures was closing out, the contract price for March delivery of US crude fell more than 4% to close at $28.33 a barrel. After that time, March was the only contract quoted, and there was no record of oil trading at $27.55 a barrel.

Later, January 26, 2016: with regard to the original post, a reader asked what the significance of the "rollover" date for Brent/WTI. I'm hoping a reader can come up with a 30-second soundbite to explain the significance. I'll ramble for awhile. And expose my ignorance.

The most important takeaway from this change is that it adds one more variability for traders to consider when trading oil futures.

I think the biggest change in tradiing oil futures is the fact there are no more cartels: OPEC has opened the spigots, telling its members they are free to produce as much as they want and sell it where they can. Likewise, the other cartel, the US cartel, no longer exists now that the US has relaxed its rules for exporting crude oil. From my perspective, it has become a free-for-all.

The second most important broad-brush data point to understand is the type of oil: heavy oil, light oil, high sulfur, low sulfur.

For the layperson at home, the third most interesting broad-brush data point is probably the "television crawler" -- and it's always confusing whether this is a spot price, a futures contract, or whether it is WTI or Brent (never Saudi's benchmark).

Thing would be so much simpler if changes in pricing (spot pricing and futures pricing) occurred at the same time for every "type" of oil from every source. I would assume the fact that the 5-day gap between Brent and WTI has now been "lengthened" to "three weeks" will make things that much more difficult to follow -- and that much more challenging for traders, though I assume smart IT folks will re-write the trading algorithms to include this new wrinkle.

The big question is not what the significance of this change is -- I think folks can come up with any number of ideas -- though I'm still waiting for a reader to come up with the "a-ha" comment, the "now I get it" comment but rather --- the big question is whether this change by the folks that manage Brent trading did this in response to the US relaxing its rules on exporting crude oil.

If Brent and WTI are competing for the same markets, is there some advantage to moving the expiration date / the rollover date up -- two weeks before your competitor makes the change? Is there some advantage for Ford to announce its rebates for next year's F-150 series two weeks before GM announces its rebates for its pickups?

And, again, maybe this is easier than I'm making it out to be. Maybe I'm completely misreading this. All I can say for sure is that it will take some time for traders / arm-chair analysts / CNBC talking heads to sort this out. Something tells me, it's a big deal. I just don't know the "Oh, now I get it" answer.
 

Original Post

We'll probably see this again (and again).

An EIA "energy cookie":

A change to the North Sea Brent crude oil futures contract will alter the way prices for Brent futures are compared to futures prices for West Texas Intermediate (WTI) crude oil.

Beginning January 29, the Brent contract will expire, or rollover to the next month, approximately two to three weeks before expiration of the WTI contract for delivery in the same month. Prior to the change, the Brent contract rollover was only five to seven days ahead of the WTI rollover. --- EIA

I guess I understand that.

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Inversions

I saw the headline in the WSJ today but forgot to link it. Glad to see it popped up in the NYT.

From The New York Times:

Monday’s announcement by Johnson Controls is just the latest effort by corporate America to flee the United States.

In the last year, Pfizer said it was leaving for Ireland, as did Medtronic, the medical device maker. Coca-Cola’s largest bottling company, after selling its domestic operations, is heading to Britain. (The company, Coca-Cola Enterprises, insists it isn’t for tax reasons.)

Until Washington lawmakers reform the tax code, we will continue to see an exodus of American companies from our shores in search of a lower tax rate. By my count, based on a series of conversations with investment bankers, there are probably at least another dozen deals of meaningful size being negotiated in the pipeline. The question is what it will take for Congress to not only take notice, but to pass legislation to thwart this steady corporate migration.

The Obama administration has taken action to rein in so-called inversion deals. Last year, the Treasury Department implemented a rule that an American company could not complete an inversion if it owned more than 60 percent of the combined company; Johnson Controls will own 56 percent of the combined company.

A bit more on Johnson Controls:

Congress approved a bailout plan worth almost $80 billion for General Motors and Chrysler, saving the automakers and, indirectly, suppliers like Johnson Controls.

By 2010, with its business back on track, Johnson Controls doubled the pay of Stephen Roell, then its chief executive, to more than $15 million.

Despite the federal government’s rescue — and hundreds of millions of dollars in tax breaks over the last several decades from states like Michigan and Wisconsin — Johnson Controls said on Monday it was renouncing its United States corporate citizenship by selling itself to Tyco International, based in Ireland, a deal struck in large part to reduce its tax bill, which it said should drop by about $150 million annually. (Wow, that's a long sentence.)

GE moved from Connecticut to Massachusetts for tax reasons. I'm starting to see a pattern here.