Spread ‘Em!

This morning we got another unpleasant reminder about how stock prices, and to an extent, those of other assets, are currently tied to the price of crude oil.  Pre-market stock index futures were rising after some solid gains in Asian stocks and against relatively placid oil futures.  The decent mood faded quickly after news reports of attacks on Iran’s South Pars field.  Oil futures then leapt higher and stocks gave back their gains.  Notably, the rally was much sharper in Brent than WTI, taking that spread to levels not seen since the aftermath of Russia’s Ukraine invasion.

It is typical for Brent to trade at a premium to WTI, something that is rooted in fundamentals.  A key factor is its seaborne delivery, rather than via pipeline to a landlocked hub in Oklahoma.  Shipping and storage are key factors in the price of oil, which is largely reflected in the typical spread between the two key oil benchmarks.  Nonetheless, that spread tends to widen in favor of Brent when supply disruptions occur.  Quite frankly, US domestic production is less susceptible to geopolitical risk than oil headed for Europe. 

The chart below shows the spread between Brent and WTI over the past five years.  Bearing in mind that the Ukraine invasion began in February 2022, we see that the spread remained relatively volatile even as that situation unfolded.  Although the spread tended to widen during the early part of 2022, it did not move unilaterally.  From February through August of that year, the trend was for a wider spread, but WTI even exceeded Brent for a brief period in May 2022. 

5-Years, Daily WTI – Brent Futures Spread (white), with 30-day Moving Average (green)

Source: Bloomberg

Thus, while it is generally a good idea to favor Brent over WTI in periods of geopolitical crisis, its outperformance is not a certainty.  But I wish I’d followed the advice of my friend who told me he was selling his WTI and switching to Brent.  Good for him!

On a separate note, today is another down day that is actually not as bad as it could be.  Yesterday we noted that this morning’s PPI report had the potential to be a one-tailed risk event because traders could show concern if there was a bit more inflation than anticipated but overlook a good result as already obsolete.  All the key month-over-month changes for February were above consensus.  With all three expected at 0.3%, the headline reading came in at 0.7%, while Ex Food and Energy and Ex Food, Energy, and Trade both came in at 0.5%.  Investors were by no means rooting for higher-than-expected inflation readings, so we can assert that a -0.7% move in the S&P 500 amidst the combination of higher oil prices and higher inflation might be considered a decent outcome.

Finally, as we await this afternoon’s FOMC meeting, bear in mind an important fact: stocks have tended to move relatively modestly on Fed days over the past several meetings.  Since May 2025, 7 meetings ago, we have not seen SPX move more than 0.67% on the day of an FOMC announcement.  Alongside the near-certainty of no rate change this afternoon, it is not surprising to see a notable bump in VIX or implied volatilities ahead of the event.

Source: Interactive Brokers