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How to play oil price volatility right

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bear_bull January 6, 2015 (Chinavestor) Oil prices drive two sectors, but to a different direction. This creates tremendous opportunity for the intelligent investor. During times when oil price creeps higher, investors should own stocks like Whiting Petroleum (NYSE:WLL) and Continental Energy (NYSE:CLR). When oil enters bear markets, investors should sell shale oil stocks and swap them to airliners. Here comes the logic. When oil prices increase, oil developers do well at the expense of airliners. But when price of oil falls, oil producers suffer but airliners shine. To illustrate how much the price of oil effects these sectors, we are going to pull two charts. One is for the short term, just three days. The other is for long term, 10 years. And to make the point better, we chose an oil producer that is EXTREMELY sensitive to oil prices: shale oil companies. Whiting Petroleum (NYSE:WLL) is the largest Bakken shale play and is an excellent stock to study price volatility. For airliners, we chose China Eastern Airlines (NYSE:CEA), China's second largest carrier by fleet size. This is also a volatile stock.

 

 

Whiting Petroleum (NYSE:WLL) in red and China Eastern Airlines (NYSE:CEA) in blue in January 2-6, 2015.

WLL_CEA_3days

Investors shorting WLL and buying CEA on time made extra profits just in three trading days. The gap between the two is over 15%.

 

Whiting Petroleum (NYSE:WLL) in red and China Eastern Airlines (NYSE:CEA) in blue 2005-2015.

WLL_CEA_10years

Commentary to the chart. Take out CEA's 2007 run up. That was a failed merger attempt with Singapore Airlines. Also, investors have to take 2008-2010 period with a grain of salt. This is the time of the financial meltdown.

Instead, investor have to focus on the 2010-2011 period, a time when oil prices recovered. Whiting Petroleum (NYSE:WLL) stock price increased several fold while China Eastern Airlines (NYSE:CEA) fell significantly.

Oil prices stayed put in 2011-2012, neither Whiting Petroleum (NYSE:WLL) nor China Eastern Airlines (NYSE:CEA) developed a trend.

Then oil prices went back above $100/barrel in 2013-2014 and thus shale oil plays did well. Whiting Petroleum (NYSE:WLL) stock price doubled while CEA fell from the $25 level back to the $18-$15 level.

Finally, shale oil plays like Whiting Petroleum (NYSE:WLL) and Continental Resources (NYSE:CLR) got crushed as oil went from $117 to $48 under six months. But is was bonanza for China Eastern Airlines (NYSE:CEA) as the stock is back at the $25 level, not seen in five years.



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