Basis Trading in Energy
Location and quality basis; WTI-Brent and regional spreads; basis risk in hedging
Basis Trading in Energy
Executive Summary
Futures prices are standardised: a WTI contract delivers 1,000 barrels at Cushing, Oklahoma. Crude is consumed everywhere. The difference between the standardised futures price and the price actually paid or received in a specific market is "basis." Basis is central to hedging effectiveness and to low-risk arbitrage. This module covers basis definition and mechanics, location and quality basis, basis trading strategies, arbitrage opportunities, and basis risk management for refiners and producers. For practitioners and consultants, it supports programme design and risk communication.
Learning Objectives
By the end of this module you will be able to understand basis definition and mechanics (spot price vs futures price), calculate basis in different locations and analyse what drives basis changes, evaluate arbitrage opportunities between crude types, locations, and contract months, design basis trading strategies for hedging and speculation, and assess basis risk and implement hedging for basis exposure.