* Brent/WTI futures play declined as volatility ebbed
* Now trade back in fashion due to U.S. tax reform plan
* Money managers double holdings in Brent and WTI futures
* But U.S. import tax proposal may never see light of day
* GRAPHIC - Brent/WTI futures spreads: reut.rs/2jX82wz
By Dmitry Zhdannikov and Amanda Cooper
LONDON, Feb 7 After several years of neglect,
oil investors are again betting heavily on the price difference
between two global benchmarks - Brent and U.S. crude futures -
due to a push in Washington to impose a controversial import
At the start of this decade, the play on the spread between
North Sea Brent and U.S. West Texas Intermediate (WTI) contracts
futures earned traders and banks hundreds of millions of
dollars, provided they played the high-stakes game right.
This trade, nicknamed the "widowmaker" for its high level of
risk, fell out favour about four years ago when the two
contracts resumed moving in tandem, sharply reducing the spread
volatility on which it depended.
Then OPEC's decision in November to cut crude output, hoping
to reverse more than a year of steep price declines, revived
investors' interest in oil generally.
Now the WTI/Brent trade is back in fashion on expectations
that the spread will again become highly changeable due to the
possibility that under President Donald Trump the United States
will slap an effective 20 percent tax on imports, including oil.
Commodity traders and investors are betting that WTI will
strongly outperform Brent, at least initially, provided the U.S.
corporate tax reform includes the border adjustment tax.
Many Republicans in Congress want this to help revive
domestic industry, but whether the import tax ever sees the
light of day remains uncertain.
House Speaker Paul Ryan backs the measure although some
fellow Republicans have suggested it might struggle to get
through the Senate. Trump has sent mixed signals but criticised
the plan as too complicated, while opposition is growing among
industries likely to be affected.
On top of this, lawyers say it would almost certainly break
World Trade Organization rules.
Still, the uncertainty has had an electric effect on oil
markets. Exchange data shows money managers have racked up a
record of nearly 900 million barrels' worth of combined WTI and
Brent futures and options, almost doubling their holdings in the
last two months alone.
This build-up has been far more aggressive in the WTI
market, where investors have doubled their holdings by nearly
225 million barrels, while in Brent, they have raised them by
around 45 percent, or 137 million barrels.
Fund managers are putting their money on an initial rally in
WTI versus Brent if the tax comes into force. The argument is
that U.S. buyers would turn away from imported oil such as Brent
in favour of domestic crudes exempt from the tax. Goldman Sachs,
for instance, forecasts WTI would immediately appreciate by a
quarter relative to Brent.
This would mark a contrast to the last few years, when
swelling U.S. oil production from shale deposits has kept U.S.
futures at a discount to the North Sea benchmark. WTI could even
trade at a substantial premium over Brent.
Uncertainty over U.S. tax policy poses problems for the oil
industry itself. Analysts at Goldman Sachs - one of the most
active banks in physical commodity trading - advised crude
producers last month to manage their price risk by selling
long-dated Brent futures and consumers to buy WTI futures.
"We recommend shifting hedges to Brent as the basis risk is
smaller than the policy risks ... In turn, consumers and
refiners should consider hedging through WTI instead of Brent
until the policy uncertainty is lifted," the bank said.
"Should the (tax) be implemented, we recommend that US
producers aggressively take advantage of the 25-percent relative
appreciation of WTI prices."
The analysts assigned only a 20 percent probability to the
tax being implemented, noting that at the time of their Jan. 24
report futures prices implied only a 9 percent chance.
They also expected a rally in outright WTI prices would be
short lived, as the initial jump would encourage U.S. producers
to raise their output. Combined with the likelihood that OPEC
members would resume their production growth, this would create
a large oil surplus in 2018, they predicted.
MAKING WTI GREAT AGAIN?
Futures prices already show the expectations that Brent's
premium over WTI will dwindle.
Front-month Brent futures are currently trading
around $55.50 a barrel, about $3.00 above WTI. However,
this premium all but disappears further along the futures curve
for dates when the effects of any import tax might be felt.
The December 2018 WTI contract is at a discount of just 45
cents to Brent - compared with around $2 in early January -
while the December 2019 contract is only 10 cents below
its Brent counterpart.
Hedge fund manager Pierre Andurand believes a much bigger
change of relative fortunes is possible. "If the tax is adopted,
WTI could move to a $10-premium to Brent, providing a
substantial economic advantage to U.S. producers," he told
investors in a monthly newsletter.
He expects OPEC, which let prices dive in 2014-15 in the
hope of putting higher-cost U.S. shale producers out of
business, to show greater discipline having agreed the output
cuts. "While we believe there is a 30 percent chance for the tax
adjustment to go through, it also reinforces our belief that
OPEC will do anything that is necessary to push oil prices
higher as soon as possible," Andurand said.
The U.S. shale oil producers themselves aren't yet buying
into the idea of an initial tax-driven WTI surge.
Stuart Staley, head of commodities trading at Citi, said
last week that he had yet to see interest materialise among
industrial clients for playing the WTI/Brent game.
A senior executive at a major trading house added that
shale producers have been conspicuous by their absence from the
hedging market in the past few weeks, precisely because of their
reservations over the border tax.
"Basically shale firms don't know what to do. You would look
stupid if you hedge and the WTI price rallies afterwards," he
(Additional reporting by Catherine Ngai in NEW YORK and Liz
Hampton in HOUSTON; Editing by David Stamp)