How To Play The Spread In Brent and West Texas Oil (USO, UCO)

Investors should pay attention to the spread in the two types of oil traded. It's very profitable if you know how to trade it. There are two types of oil traded around the world. West Texas Intermediate (WTI) and Brent North Sea (BNS) crude. WTI is the most commonly referred to oil here in the United States, as it is traded on the New York Mercantile Exchange, now a subsidiary of the Chicago Mercantile Exchange CME. Brent is traded on the Intercontinental Exchange ICE, and has been since 2005. Before that, it was traded on the open-outcry International Petroleum Exchange in London. WTI is currently trading below BNS at this moment, with WTI trading at $73.05 per barrel and BNS trading at $74.78. In all my years of covering, analyzing and watching the commodities markets (admittedly not as long as some of the grey beards), I have never seen WTI not eventually reverse course, and cost more than BNS. Depending on the fluctuations in the currency markets, BNS may cost more than WTI for an extended period of time. But it always reverses course, with WTI costing more. There are two ways to play this and I'm going to give the bull and bear case. Keep in mind I lean towards the bull case in this one. If you believe domestic growth is going to fall off a cliff, then your hypothesis would also include WTI taking a nosedive. Investors could short United States Oil Fund LP ETF USO or Occidental Petroleum Corporation OXY. OXY is most closely linked to the price of oil, as indicated here in this chart. I don't believe this is the case, and that growth will remain moderate and investors are too worried about growth slowing. Once this thesis begins to play out, WTI should begin to outperform BNS. The way to profit off this is the reverse of the trade above. Go long USO and OXY. I would expect WTI to climb over $75 per barrel, good for a gain of at least $2 per barrel. Personally I see, oil at the end of the year somewhere in the low 80's, as growth isn't as bad as expected. Another catalyst for this thesis is additional stimulus provided by the U.S. government on fears that growth is slowing. WTI always comes back to trade at a higher price than BNS. It's not a matter of if, it's a matter of when. I'm inclined to believe it starts to happen sooner rather than later, and investors may want to take a look at those plays mentioned above to profit off this spread in the different types of black gold.