Tuesday, 17 March 2015

Whale Oil Beef Hooked

Whale oil beef hooked. Look at the price of oil and oil stocks.

Though I have been out of oil for a while I have been watching it with keen interest and a couple of associated stocks. Of interest is the timing of relative highs and lows.

Lets look at the charts below of Tullow, BP and Premier ( the candles) and Brent oil (the black line)

We can see that the lift off from the base in Jan was led by the stocks rather than oil and the turn lower kicked off in the smaller more speculative stocks like Tullow and Premier before oil finally got around to catching up. Even the mighty BP refused to go up after the start of February. 

So what is going on here if oil stocks are meant to follow the oil price? Well could it be that oil actually follows the stocks? If so how? 

I am wondering if we have a speculative interest, or even model interest in the markets that has worked out that the profits to be had influencing lead/lag correlaters is greater than playing in the underlying commodity alone due to influences of liquidity and market capitalisation.

Option 1 - So you are going to sell oil and you know that the amount you are going to sell is going push the market down as you know that once it starts to go everyone will chase it. So instead while oil is steady you instead you start selling oil stocks. the spreads between oil and the stock widen and other players support the stock as it now begins to look out of line, giving you a stronger bid into which to sell. You carry on selling stocks until the spread widens to such a point that others start to buy the stock and sell oil on the spread trade, which finally gets oil going down. At which point you start to sell that oil you were planning to sell. Which reacts as you predicted and accelerates downwards. With it the floor for the stocks goes and they melt below levels that they would normally be at relative to that oil price. At which point you buy your stocks back for a healthy profit. 

Option 2  is that you never have any oil to sell. You follow the strategy above ( including the selling oil part) but after buying your oil stock back you buy your oil back. 

This is not a new tactic and may have been famously employed in the gold markets where gold mining stocks have greater liquidity than the gold market 

April 26, 1993

Shares surge: Gold prices and the stock of mining companies soared Monday after money manager George Soros bought a 10 percent share in Newmont Mining, one of the U.S.'s largest gold mining companies. Soros, who heads the Quantum Group of investment funds, purchased the stake from European tycoon Sir James Goldsmith, Newmont officials confirmed. Gold prices have climbed 7 percent since March 10.

Gold surges after the completion of buying a miner? Hmm. Someone buying back their shorts now that their use for holding down prices during negotiations for the stock has run its course perhaps? 

Now of course there could be lot of other reasons for the price of oil and stocks behaving in the way they do but the suspicious cynic in me would be reading the massive bounce in a couple of those stocks today as an indication that oil will also base today ...  for a while at least. 

1 comment:

theta said...

Interesting observation. What I would suggest as a trade opportunity in the area is to go long oil stocks vs short oil via an etf, in an appropriate ratio to account for the respective betas (I think that unlikely the PM sector, the oil stocks have lower beta than the underlying commodity so you probably need a higher notional on the long leg, but I could be wrong here). The rationale behind the trade is effectively carry. Whereas oil majors have good carry exploiting existing oil fields and are very efficient in storing the oil etc (and possibly have hedged their oil exposure at higher spot prices which hasn't shown up in results yet), oil itself is suffering from steep contango as the back of the curve remains high. And ironically enough, the hot money that tries to play the bounce in oil prices perpetuates the contango and hurts itself, as the ETF keeps buying more expensive second month futures selling cheaper first month ones. This situation could last for a while.