The Spread Between Brent and WTI is going to $100

• Posted by Greg Harmon
• on June 15th, 2011

I cannot tell you how many times I have heard a question about how to play the spread between Brent Crude and West Texas Intermediate Crude. But if I had a dollar for every one, I would be so rich that I would stop giving you these ideas that make your life so easy and drink scotch on my own deserted island all day as my kids get fed mangoes from their baby giraffes. But I get sick of the sun easily so let me help you keep your brain from melting trying to figure this out. Below is a ratio chart of the United States Brent Oil Fund, ticker $BNO, against the United States Oil Fund , ticker $USO. Don’t you love how ethnocentric Americans are? We assume that nothing important exists outside of our borders. Sorry I digress, put a few more ice cubes on your brain and close your eyes for a minute. Feel better?

BNO vs USO

There are several interesting things going on in this chart. it shows a stair stepping pattern higher since the $BNO was created in June 2010. A measured move higher would put the top in on this stair at a ratio of 1.95 – 2.11. It is in that range now, but then there is not a lot of history to rely on. There is also a break of a rising channel at 2.00 that the ratio looks to be coming back to retest.It is outside of the Bollinger bands and the Relative strength Index is working off a technically overbought condition. But the Moving Average Convergence Divergence (MACD) indicator is large. A pullback can follow from those indicators. But playing the spread to tighten is premature. That means don’t do it yet. There are plenty of Oil traders out there that can spout about backwardation and contango as reasons why to trade this spread now. they are wrong. Price does not lie. Do not do it. Wait for a break back below the top trend line in the ratio before you even look at this spread collapsing. Until then it is in a bullish breakout higher. Once again that means do not play it. If you cannot wait then make sure your mommy is close by to go crying to when it rips higher in your face.

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