We have been looking at the oil sector to find trades that exploit the rising prices of crude. One correlation acted very unusual over the last couple days and it became a real head scratcher. But as I dug into it I am getting more convinced it is creating an even bigger move and increasing the probability of a juicy payout.

A couple days ago we noted that the two oil related ETFs USO (based on US crude prices) and OIH (based on oil services) have an interesting and often predictable relationship. Since rising oil prices often push the producers to increase production USO can be a reliable leading indicator for OIH. As we watched USO start to take off, it made sense to look at OIH as a natural follow up.

What happened was critical to understand. Here’s why–

When you look at the comparison on a chart (OIH is the yellow line on this chart of USO) you can see a couple key points. Since the war, USO has been much more volatile. If you think about it, it makes sense. The war has forced very dramatic change on the oil industry and while oil prices have gone up, the producers have had to scramble to adapt to a dramatically changing environment. Scrambling is expensive and creates uncertainty. Traders pay less for uncertainty.

When you break down the list of assets in OIH, the second largest stake BKR is going through a wobbly acquisition and is a massive anchor on OIH. That said, even the number one stake SLB is sluggish to respond to the oil prices.

The take away from this is that it looks like OIH is more muted and delayed than usual in its relationship with USO. The adjustment to make is to take positions with expirations that are a little farther out and plan accordingly for a bigger than usual drawdown. It is unlikely that oil producers will not find a way to benefit from this.

Keep learning and trade wisely,

John Boyer

Editor

Market Wealth Daily