Flux Markets | Time Spreads Skip to main content
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Time Spreads

In the oil futures market, a Time Spread involves buying and selling the same contract with different delivery months

What is a Time Spread?

In the oil futures market, a Time Spread, also known as a Calendar Spread, involves simultaneously buying and selling contracts of the same underlying asset but with different delivery months. E.g. Buy Dec ’25 Naphtha N.W.E. vs Sell Jan ’26 Naphtha N.W.E. where the value of the time spread is the difference in price between the two contracts. This strategy allows traders to speculate or hedge exposure to the changing price differentials between the different tenors on the forward curve. Time spreads are often preferred over outright contracts for speculative traders in the oil markets as they are seen as being a much less noisy and more accurate way to express market-specific views.

Market structures

The shape of the forward curve determines the time spread values

  • Contango: Future prices are higher than spot prices, therefore the time spreads have negative values.
  • Backwardation: Future prices are lower than spot prices, therefore the time spreads have positive values.

Applications in Oil Trading

  • Speculation: Traders speculate on the widening or narrowing of spreads based on anticipated changes in market fundamentals.
  • Hedging: Traders can use time spreads for a wide range of operations such as: managing inventory hedges and hedging physical purchases and sales that span across different months.

Example: Brent Time Spread

A trader enters into a physical deal to purchase a crude oil cargo in North-West Europe using June Brent Futures as the reference price. They plan to sell the cargo on to a refiner in Asia, so they then enter into another physical deal to sell the same crude oil cargo using July Brent Futures as the reference price. The difference in tenors reflects the transit time given they are buying in Europe then selling in Asia. To hedge this series of deals they:

  • Buy the June vs July Brent Futures contract for the volume they will buy and sell physically
  • They can then let the time spread expire to ensure that they are fully hedged on both sides of the deal

Risks and Considerations

  • Market Volatility: Unexpected geopolitical events or economic data can rapidly alter spread dynamics.
  • Liquidity: Far-dated contracts may have lower liquidity, affecting trade execution.
  • Margin Requirements: While spreads often require lower margins than outright positions, significant adverse movements can still lead to substantial losses.