If the volatility of global markets year-to-date is any indication of how the year will come to a close, the predominant themes going into 2014 will continue to be turmoil, fear and uncertainty. Astute traders take advantage of the heightened volatility by seeking arbitrage opportunities in the spot and forward markets around the globe. Opportunities come in the form of time, location or grade spreads. A time spread is a simple contango trade whereby the difference (spread) between front month and back month futures is above the cost of carry (storage, insurance, ancillary). One of the most notable time spreads occurred in the steep contango of the West Texas Intermediate (WTI) market at the end of 2007 and early 2008. Participants of this trade were able to store WTI, Brent and other grades in offshore floating storage, evidenced by the parabolic change in rates for Very Large Crude Carriers (VLCCs) and other available tonnage at the time (prior to their subsequent 90+% collapse).
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