Where is oil going?

WTiC and OIH, weekly, January 1st 2010 to March 7th 2012

Since February 12th, oil ($WTIC, West Texas Intermediate) has traded solidly above $100 a barrel. Analysts disagree on the so-called “Iran premium”, so how to make money on this?

As usual, rather than individual shares I’d rather focus on exchange traded funds as a speculative vehicle. If you believe oil prices will stay high, Market Vectors Oil Services (OIH) might be of interest. The chart above shows the performance of $WTIC compared to OIH. The five day correlation is very high, 0.88.

WTiC and FAA, weekly, January 1st 2010 to March 7th 2012

If you believe oil prices will decline and would like to profit on that call a great short oil play is an Guggenheim Airline ETF – its correlation with the price of oil is -0.72. The chart above shows the relationship between $WTIC and FAA. In other words, you can profit from the well known inverse relationship between oil prices and airline tickets sold.

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