Oil was adversely affected in the month of June, moving lower again. The past two months have seen oil prices "destroyed" as the economy has slowed. The drop in oil has not given the markets a ton of boost, and the weakness has been surprising, given the strength in the dollar. So, the question for July is will oil turn itself around or are we in for yet another round of weakness in July. Let's take a look at the historical moves for oil to get a better sense of how oil normally performs in July.
Oil has shown a strong pattern of being strong in July. It has been up 14/20 past years, and the six declines have not been very strong except for 2009. The largest decline in oil in July was in that year for less than 8%, so we would expect oil could hold at least $74 area by the end of July based on historical data. That lack of a large decline does point to some seasonality buying. With oil fairly flat to up, we could see things starting to bottom for oil. The extension of Operation Twist along with seasonal demand may give oil the support it needs right now.
In our research, we also looked at average gains of oil companies as well as their max drawdowns. June has been strong for oil companies. The companies we investigated are Baker Hughes (BHI), BP (BP), Transocean (RIG), Exxon Mobil (XOM), ConocoPhillips (COP), Halliburton (HAL), and Schlumberger (SLB). Here is average gain for the past twenty years:
Click to enlarge
Every company other than RIG has averaged a gain, but these are averages. To get better trading ideas, we want to know max drawdowns or max gains:
Based on this data, we believe the best opportunities are in BP and SLB. With BP, the max draw takes us down to $34, which is a solid trading level and is huge support for BP. With SLB, the max drawdown takes us to about 55. Therefore, we like the following trades:
Play #1: BP, Jul21, 35/34 Bull Put Spread (Sell the 35, Buy the 34)
Max Gain: 8.7%
Play #2: SLB Long: RIG Short
The market is still murky, but this data can give you some better ideas of just where everything can go.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
