Crude oil swaps

Crude swaps are traded on a 24 hour basis in London, Singapore, and New York. Brent is the most actively traded, followed by West Texas Intermediate, Dubai and Tapis.

Crude swaps are traded up to ten years ahead, but the most liquid markets are traded up to four years forward.

Brent: An active swaps market exists in trading the difference between Platts dated Brent assessments and the IPE front line futures contract.

This market, known as dated to frontline, has been supplemented by the dated to BWAVE market, that is, the difference between dated Brent and the daily trade-weighted Brent average reported by the IPE.

CFDS: (contract for differences) CFD's are a type of swap that trades the difference between Platts assessments for dated Brent and first month forward Brent, and can be used to manage the risk arising from differential price moves between the dated and forward market.

The CFD swap is between the uncertain or "floating" price of the dated Brent differential and a certain or "fixed" differential price, usually Platts daily dated Brent crude assessment.

In addition to dated Brent, CFD's are also used to price crudes which are sold at a differential to dated Brent.eg. Norwegian Ekofisk and Oseberg, Iranian Heavy and Russian Urals.

CFD's are priced using averages of a particular week's worth of daily price assessments as quoted by Platts, usually for the next four weeks forward. Each trade is an exchange of a fixed for a floating risk in the dated to 15 day Brent differential.

Quality spreads: Crudes such as West Texas Intermediate and Dubai are often traded at a differential to Brent, and swaps may be written against the future value of the spread between these two grades. Thus swaps will be written on the Brent-WTI and Brent-Dubai spreads.

Timing spreads: Each of the market crudes above (Brent, Dubai, WTI and Tapis) has its own timing structure, depending on how accentuated the backwardation or contango is in each of the markets.

This timing structure changes constantly, and a fairly active swaps market has developed around it. Swaps may be traded on a month against month basis, as well as quarter-against-quarter and less commonly, year against year.

Crack spreads or margin swaps: Crack Spreads or Margin swaps are used by refiners and offered by banks, or other hedgers trading with refiners to lock in a spread for the refiner's product.

The basis of these swaps are a combination of Platts daily product assessments to a crack spread index or calculation often created by a bank.

Swaps are also traded on refinery product differentials, such as the differential between Low and High sulfur fuel oil in Northwest Europe.

Crack spreads are traded for each quarter, or on a term basis usually a year in advance. "If a refiner produces 20% gasoil, 10% jet, 20% naphtha, and 50% fuel oil, you can take a formula for these percentages, less whatever crude you are running and do a swap.

One of the most commonly used pecentages for crack swaps is called a 3:2:1 crack spread" which is equal to: 3 times the crude index, 2 times the unleaded gasoline index, and 1 times the heating oil index."