You can see that prior to about 2000, the spread was quite stationary, implying that it could have been traded using simple spread trading rules.
After that, you can see that the spread started to drift, so you need to be smarter with your implementation (perhaps normalizing the spread somehow, or coming up with a different ratio).
Calendar spreads are among the most versatile tools in an oil trader’s arsenal. At their core, they’re dead simple: you simultaneously buy and sell oil futures contracts with different expiration dates.
For example, you might buy December WTI crude and sell June WTI crude in the same transaction. This creates a position that profits from the relative price movement between these two contracts rather than from outright price direction.
Calendar trade
Why is this useful? Because it lets you strip away some of the noise of the broader market and focus on structural forces that drive the relationship between different contract months.
In oil markets, these calendar spreads tell you a ton about what’s happening in the physical market:
Storage economics: When far-dated contracts trade higher than near-dated ones (contango), it reflects the cost of storing oil. The spread should theoretically equal storage costs plus interest. When it’s wider than that, traders can profit from the expected reversion (of course, there may be very good reasons for the spread to be wider than that – hence that specialist knowledge we talked about earlier).
Supply scarcity: When near-dated contracts trade higher than far-dated ones (backwardation), it signals immediate scarcity. The market is saying “we need oil now, not later.”
Seasonal patterns: Certain spreads capture predictable seasonal demand patterns. For instance, the December-to-March heating oil spread typically widens as winter approaches.
The beauty of calendar spreads is their versatility. You can use them to:
Make directional bets with less risk: If you think oil prices will rise but don’t want full exposure to market volatility, you might go long a deferred month and short a nearby month in backwardated markets (or the reverse in contango).
Exploit storage economics: When futures prices exceeds storage costs, sophisticated oil traders can buy physical oil, sell futures, store the oil, and deliver against the contract for a risk-free profit (assuming they have access to storage).
Hedge production or consumption: Producers can use calendar spreads to lock in price differentials across their production timeline without taking a view on absolute price levels.
Trade seasonal patterns: Winter heating oil demand, summer driving season, and refinery maintenance periods create reliable seasonal patterns in certain spreads. These are the sorts of trades that systematic traders should think about.
Calendar spread options take this concept a step further. Here, you’re trading the options on these spreads rather than the spreads themselves. For example, you might buy a six-month call option and sell a three-month call option at the same strike price.
Strategy 3: Cointegration Pairs Trading
This strategy exploits the relationship between different oil benchmarks.
Brent/WTI spreads tend to mean-revert due to arbitrageable transportation costs. When the spread gets too wide, traders can physically move oil to capture the difference (minus transportation costs).
Some research suggests that trading a mean-reverting spread on the two benchmarks would have been a profitable strategy from 1993-2022.
The hypothesis for why this works is that there’s a physical arbitrage opportunity – if the spread gets too wide, traders can literally buy oil in one location and sell it in another, minus transportation costs.
Strategy 4: Seasonal Pattern Exploitation
Oil markets exhibit clear seasonal patterns driven by inventory cycles. For example, OECD inventory draws and builds create predictable summer/winter spreads.
Seasonal trades are among my preferred strategies for independent systematic traders – they’re simple, easy to understand, driven by predictable real-world dynamics, and are hard to mess up.
Research suggests that going long December futures and short April futures captured a significant edge from 1983-2017, with a seasonal return of approximately 1.32% monthly from November to March.
This strategy is effective because the physical reality of seasonal demand generates predictable price patterns that persist year after year.
Strategy 5: Refinery Utilization
This is a somewhat speculative idea, but it might be worth testing out.
Related to the crack spread idea above, this idea exploits the relationship between refinery utilization rates and crack spreads.
The idea is that when the EIA reports refinery utilization below 85% or above 95%, crack spreads tend to move predictably in the following weeks.
Low utilization: Go long crack spreads
High utilization: Go short crack spreads
This may be effective because low utilization typically signals maintenance or unplanned outages, reducing product supply and widening spreads. High utilization signals ample capacity, which can put pressure on margins.
Now that we’ve covered some strategies, let’s talk about practical implementation:
For futures trading, you’ll need:
Futures-approved brokerage account
Sufficient margin (typically $5,000-$10,000 per contract)
Understanding of contract specifications
For ETFs:
Standard stock brokerage account
Awareness of roll yield and tracking error
Oil is volatile. Period. A few guidelines:
I like to size my positions based on how much volatility I want the position to deliver to my portfolio, based on how much volatility has realized recently.
Understand the leverage you’re using and how it amplifies your returns, both positive and negative
Have a plan for extreme scenarios (like negative prices!)
CME WTI crude futures trade:
Sunday – Friday: 6:00 PM – 5:00 PM ET (electronic)
Monday – Friday: 9:00 AM – 2:30 PM ET (open outcry)
Liquidity is highest during US market hours.
Futures contracts receive favorable 60/40 tax treatment in the US (60% long-term, 40% short-term capital gains), which can be advantageous compared to ETFs taxed as ordinary income.
Recommended Approach for Beginners
If you’re new to oil trading, here’s my suggested path:
Start with ETFs: Get familiar with oil price dynamics without the complexity of futures
Study futures curves: Understand contango and backwardation
Start small: Keep your position sizes small
Focus on simpler strategies: Seasonal and spread trades are more forgiving
Diversify: Don’t put all your capital in oil trades
ETF Considerations for Beginners
If you’re starting with ETFs, be aware of their limitations:
USO, the most popular oil ETF, has historically underperformed during periods of contango because it must constantly roll futures contracts to maintain exposure.