How long will oil price remain cheap?: 5 ways to trade on crude oil

Thinking to write about the recent fall of oil price, I found an article on Reuters with a similar opinion to mine:

Therefore, leaving the detailed analysis to the article, I’d like to summarize the major arguments and explain how to trade on the financial markets according to the cheap oil.

As the article describes, it’s much easier to predict how long oil will remain cheap than to say how low it will fall. As long as Saudi Arabia is serious about destroying the shale oil industry in the US, it won’t decrease its oil production till it succeeds. Thus, we can expect that oil prices will remain low until many shale oil firms in the US stop producing or go bankrupt.

It takes time until it happens. It’ll be, say, 6 months or one year. Until then, we should expect oil prices will be kept below $60, which is assumed to be the break-even point of the US shale oil firms.

What kind of investment will be effective in this situation? I wrote down 5 strategies that you could take from now on, excluding ones the best part of which is already gone, such as shorting crude oil futures or the Russian ruble. The first one is to sell the call options:

Sell the call options of the crude oil futures

When we can expect the prices will be kept below a certain point, selling the call options is a good strategy. As it’s about the US oil firms, we should sell those for WTI crude oil futures, rather than Brent. This investment will be very attractive if you have a chance to sell them when the oil price is close to $60. Not limited to oil prices, it’s always a good choice to sell options when we expect the price will remain in a certain range.

Buy good oil firms at a cheap price

It’ll be only possible to buy the stocks of oil firms when the stocks of good oil companies such as Exxon Mobil (NYSE:XOM、Google Finance) happen to fall much further. The current prices haven’t yet reflected the expectation that oil prices will remain low for more than half a year.

In addition, we must avoid the US oil firms that have invested by issuing high-yield bonds as they expected high oil prices. They will be the very first to die.

Buy Russian stocks

Due to the low oil prices and the sanctions from the West, Russian stocks in general have already fallen much below reasonable prices, and there are several attractive companies. We need to be careful, though, when we choose which specific company to invest in.

The extremely depreciated ruble has increased their debts in dollars and elevated the interest rates of the high-yield bonds. The financially unhealthy firms should have a risk of default. It’s also unclear how badly the increasing prices of imported goods affect the personal consumption.

However, it’s also true that in the Russian stock market the stocks of several companies are too reasonable to just avoid. The exporters are benefiting from the depreciated currency. What we can say here is that we do recommend the Russian stocks if you choose companies carefully, but we shouldn’t rush. As President Putin himself stated, it’ll take a couple of years for Russia to recover from the situation. Considering the future of oil prices, the best buying opportunity will come, at earliest, in late 2015.

Buy airlines

We can also recommend airline stocks. They benefit from cheap oil especially in the US and the UK, where the economy and the currency are relatively strong. From the US, we’d recommend JetBlue (NASDAQ:JBLU、Google Finance), and from the UK, we’d suggest EasyJet (LSE:EZJ) which we introduced before. Though they’re reasonably priced even now, it’d be even better if you can buy them when they temporarily fall.

Buy property companies in the euro zone

Unlike the Bank of Japan, which implicitly denied further easing because of cheap oil, the ECB (European Central Bank) is sensitive to a short-term move of the inflation rate, and consequently if cheap oil prices put a pressure on the euro zone’s inflation, it’ll motivate the ECB to decide the quantitative easing. In that case what benefits the best is the property companies.

For the specific names, we’d recommend Gecina (EURONEXT:GFC) as we mentioned many times, rather than German property companies, which have already gone up.

Not limited to the current situation, the way to trade on some issue is not only to just buy or sell the main instrument. We can pursue further profit by considering how the affairs proceed and how the markets gradually reflect it.

We shall keep watching the situation with oil, especially what Saudi Arabia will do.