Oil has soared since I tipped it – take profits or hang on?

Dominic Frisby

Back in February, we said that oil was the trade of the lustrum (TOTL).

A lustrum, by the way, is a five-year period. Useful word. Surprised we don’t use it more.

Today we check in on the TOTL, as we will from time to time, to monitor its progress…

Our five-year trade has done surprisingly well in just three months

Go long and be strong was the advice on oil back in February. West Texas Intermediate (WTI) was $33 a barrel at the time, Brent was $36. There was concern it would go lower, but it was cheap, and over a five-year timeframe it was going higher.

For the ordinary investor, oil is a pain-in-the-backside investment. The exchange-traded funds, which are supposed to track the oil price, often fail to because of vagaries of backwardation and contango when futures contracts are rolled over. Spreadbetting is another option, but is a risk in itself – and it is too easy to get shaken out of a position. Spreadbetting is not for lustrum trades.

This all forces you into the realm of individual companies and the risk that entails. Neither BP nor Shell are for me. They do not track the oil price as closely as you would expect, and I get cross when I read how much the bosses are being paid. Surely your author, too, is worth £14m (plus expenses)? You, the reader, are certainly worth that. We are all worth £14m (plus expenses).

I picked BHP Billiton (LSE: BLT) as one tip. Not because its boss, Andrew Mackenzie, is paid a comparatively paltry $4.6m, but because I’ve found that, over time, BHP tracks the oil price better than Shell or BP. Oil is BHP’s single largest product. We got in at 700p.

Tullow Oil (LSE: TLW) was my riskier play on the theme. 170p was the “in” price.

So far, TOTL is doing well. Brent hit $48 and WTI just shy of $47 late last month. Both have slipped back slightly, but we’re up about 40% in three months. It’s tempting to take profits and take the rest of the year off.

BHP has done both better and worse. From the 700p entry point, it went over 1,000p. But with the hammering iron ore has taken this last week, it has slipped back to 800p, where it is teetering nervously.

Annoying, that. It’s supposed to be our oil play, but it’s taking a hit for its industrial metal exposure. Well, it’s not like it was unknown that BHP has industrial metal exposure. Give it time is all I can say – over time BHP tracks the oil price better than Shell or BP. This will right itself. We’re still sitting on 15%-odd gains and this is a lustrum trade.

Tullow has done better. From the 170p buy price it touched 290p and is currently sitting at around 240p – 45% gains in three months. We’ll take that. It’s a slight improvement on oil itself. Is that extra 5% worth the individual company risk? There’s a question. “Probably not”, is the answer, but, under the circumstances, we’ll take it.

But oil, Tullow and BHP are all now pulling back. According to my own short-term trading models (which, like all short-term trades, work some of the time, but not all of the time), I now have all three on “sell” signals. The timing of the February call meant quick and substantial profits. Do we want to risk giving those straight back?

It gets you fingering the sell button.

Hang on – and get ready to buy in if you haven’t already

What to do, what to do? It’s good to go back and remember the original reasons for the trade. Oil was historically cheap and it was cheap relative to other assets. Over the lustrum it was going a lot higher, I felt, when making the trade.

I did not set targets, but any targets I had in mind have not been reached – and are much higher than where we are today. Sure, oil might pull back further, but it might also rally. If we sell we have lost our positions, something you don’t want to do in a bull market – and that’s what I think this is.

To start meddling is a direct breach of the buy-and-forget strategy I was so intent on following for this particular investment.

So my trade remains a hold. For what it’s worth, my oil broker buddy says we can expect oil to trade in a relatively small range over the next few months. It’s a buy at $41 and a sell at $47. He doesn’t know any more than anyone else about the future, of course, his is just another opinion, albeit one that is “at the coalface”, if you’ll forgive the mixed metaphor.

But to range trade over the next few months makes some sense in the grand scheme of things – it would be consolidating these recent gains.

So we observe, nod wisely and carry on with our day. And we quietly recommend any investors looking to join us on TOTL to look for pullbacks over the summer – $41 is a good entry point, so I’m told.


Category: Market updates

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