Oil, IAG and BP

So a fairly predictable overshoot in Crude Light, past the $35 I was expecting to $30. I read today that it is estimated Libya lost $68bn in oil revenues thanks to their political instability. We can only wonder how low oil might have been during recent months had they been producing normally. If I were running an oil-dependent business, particularly any form of transportation, I’d be thinking about hedging upwards now.

A lot of the effect of the low oil prices will take time to filter through to the P&L, so if we are about to see a turnaround in the price, or even a levelling out, then being Long Oil and Short any combination of adversely affected companies could be a shrewd strategy. Or just long any potential winners.

A quick look at the oil chart [NYMEX:CL] shows an upwards turning MACD, which is unlikely to argue with a rising price, and headroom up to around $35 where it encounters the cloud. There’s a case for a levelling off over $40 looking at the congestion area that typified the autumn. There’s also a historic support level there in the low $40s from earlier in the year. So that could become the new normal: $40-45 oil.

In the medium term oil is more likely to rise or go sideways than fall, and that would give more winning scenarios than a 50:50 split in our hedge trade. Remember, the companies would only have to fail in relative terms, not absolute.

BP [BP.] is an obvious contender, with a prominent sell-off last year, and subsequently a congestion area for the last six months. This is a sign of weakness and suggests this one could fall hard but there is that low from 2010 to think about. Add to that 300p might be an emotive price level. But with a stock this size who is holding it? I’d suggest a lot of it is in pension funds. Pension funds have a real problem as they have to stay largely invested and not in cash. That is a straight-jacket and means they have to take the blows as a market goes down. I expect they almost regard it as an occupational hazard. So they will give a lagging reaction to reality. Some poor results and that could mean some big disposals if they have to bite the bullet. That could produce a measured move, which, based on the congestion area, would give a target of 240p.

By contrast there are companies that are certainly benefiting from low priced oil. IAG [IAG], or BA as I still call them, could be about to spike up. I’ve used a monthly chart to illustrate this one. It looks all the more spectacular, which it is, in this format. We’ve broken above the high of ’07 and created a congestion area just under 600p. BA is a rather unique business model, especially as their European operation is really all about feeding into their long-haul services out of UK airports. As a result you get fed on BA short-haul flights, albeit what seems like a bonsai sandwich (size being the reason), and you get to use a more modern terminal here in the UK too. All of this is good news for the discerning travel snob, which I most certainly am.

What I find interesting with this chart is that it looks like a massive reversal signal. Any real momentum and that high at 750p from ’97 is easily achievable. Then the sky is the limit. That’s a really strong upward trend since 2012 and it’s looking bullish. They will certainly have oil hedging down to a fine art so should be able to maintain low fares and thus good profits. Could it double over the next few years?