Oil Spread Trade That’s Pretty Slick

04/22/2011 11:52 am EST


Hubert Senters

Founder, HubertSenters.com

There are a couple interesting ways to trade the disparity between the Brent and West Texas Intermediate (WTI) crude contracts, explains Hubert Senters of Trade The Markets.

Well all eyes have been on oil recently because of unrest in the Middle East and a lot of other external factors. Our guest today is Hubert Senters from TradeTheMarkets.com to talk about that. So Hubert, where do you think the opportunities lie in oil right now?

There's a really good trade right now in the Brent/WTI spread. WTI is West Texas Intermediate, Brent is another crude oil contract that you can trade on a different exchange. 

I usually trade the CO contract, but the good trade right now—the opportunity—is you can't really import WTI into Asia. Plus nobody from Asia can actually trade WTI. So right now, Asia is using a lot of crude oil, but they're using the Brent contract.

So in other words, Brent is going substantially higher than WTI. So there's that spread and it keeps getting wider and wider because Asia, you know, China, uses way more oil than we do right now. I don't see that's going to stop any time soon.

So there's two opportunities. You have to figure out which one you kind of believe in and trade that. A lot of people think that eventually, the spread is going to get tightened and there's going to be the opportunity, so you can short the Brent contract and go long the WTI as they come back in to parity. 

I think the better opportunity is once they get closer, I would rather actually go short WTI and long Brent as the spread widens out again as China uses more oil.

That sounds like a real fundamental trade for a technical guy. I was surprised a little bit about that.

You know, I do most of my stuff as mainly technical, but when you do some fundamental stuff like that, I will still trade it technically.

I will wait until I get a technical set-up on the chart to actually execute the trade. But the fundamentals are kind of neat to follow.

So let's talk about oil in general Hubert. Do you see this unrest in the Middle East increasing the price of oil here going forward?

I don't think any of the price action in oil recently, and the volatility, I don't think it's going away any time soon.
I think you're definitely going to see $100-a-barrel oil in the near future if it's not trading right there now. [Interview conducted February 2011 – Editor] So I think it's going to go higher.

I don't know if we're going to get up around $140 or $150 a barrel, but definitely look for crude to go higher this summer.

I know that you mostly focus on technicals, so do you think these markets that are highly influenced by news, do you give a little more weight to the fundamentals?

Not when I'm intraday trading them. I do a couple trades in the big contract, the CL contract that's trading on economics.

One trade that I like to do is I'll look for a new high or a new low, a current new high or a current new low. If that's taken out by one tick and I see some good volume that goes with that one new up tick or one new down tick, I just call it a “hot potato” trade, where I will grab it either long or short. 

If it's doing a new high, I'll grab it long. I'll use a ten-tick stop and a 30-tick target and just see if it'll actually work.
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