Earnings season is upon us

It's earnings season again. Alcoa started us on a sour note with a multi-cent miss even after excluding one-time items. Tiffany's warned. But benign retail numbers were out this morning (with Ross and Costco among others doing fairly well). This has given the market a lift.

I revisit a trade I was watching but did not make after the jump.

One trade that I want to revisit is the NYMEX versus Brent spread. Around April and May of last year, Brent reached a high of $125 principally due to the situation in Libya. The spread between NYMEX crude (based mainly on Light Sweet West Texas Intermediate (WTI) stored in Cushing, OK) reached $28+ in Brent's favor on October 14. Generally, the rule of thumb is that NYMEX crude should cost more than less refined Brent (sour) crude. Today, the spread stands at about $10 in Brent's favor. Coupling instability in Libya leading to a premium in Brent and increasing hydrofracking domestic production in the nation's heartland discounting WTI, we had a perfect storm where the traditional spread was reversed and then some. The increased production in North Dakota preceded infrastructure build out leading to a glut in stored oil in Cushing. For the better part of last year, this mean-reversion trade was available, but one needed considerable staying power. Many were pointing out this trade in January of last year when the spread was only around $10. The spread kept widening in the wrong direction until the October bottom. Now we seem to be back to about the same place we were last year around this time at least in terms of NYMEX Brent spread. For the past few years, the futures market for oil was in strong contango (negative roll yield), seriously discouraging rolling over long-term positions. Now, the picture isn't as clear with the market occasionally dipping back into backwardation (positive roll yield).