2018: Buy WTI and OIH ETF to play the cycle

We said:

Global economic growth remains strong, but there are signs it may be maturing. Oil performs strongly at this stage of the cycle. Three technical factors will also support oil prices: 

  • OPEC restraint allows US supply to fill the demand gap
  • The IEA predicts an increase in global demand of 1.4mb/d this year
  • Shale supply is maturing and inventories are falling

We buy WTI at $61.50 and OIH US at $24. Oil prices do well at this stage in the cycle, and thanks to dollar depreciation and fiscal stimulus, the cycle has legs. More than that, the significant changes in the structure of global oil supply support rising global demand for US oil and associated activity. We buy WTI at $61.50, watch a stop near the recent low at $57.50 and target $70. We also buy OIH at $24 with a stop at $22.80 and target of $29. This ETF covers the US oil services sector, a sector which stands to benefit from increasing US production. OIH is lagging the recent rise in oil prices, perhaps because of a weak earnings season: earnings have tended to lag the oil price by a couple of quarters. But EPS based in the middle of last year and should soon begin to reflect the improving oil price outlook and improving US activity.



On 18 April we raised stop losses on both positions to lock in profit of 5% on WTI and 4% on OIH respectively. 

On 9 May we close the long WTI position for an absolute return of 13.2%. We kept the OIH trade running but raised the stop loss to $25.80 as well as raising our target to $30.

On 23 May we raised the OIH stop loss again to $27.50 as we became more cautious. 

On 30 May the OIH trade hit our the in-the-money stop loss and was closed out for an absolute return of 13.6%. 


18 May 2018
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