Cointegration Of Oih Amongst Location Crude Oil Price

Both my friend Yaser Anwar over at the Jim urged me to exam the crude services ETF OIH instead of XLE for cointegration alongside unsmooth crude price. Their reasoning is that OIH is composed of crude drilling companies such every bit Schlumberger together with Baker Huhges, every bit opposed to XLE, which is composed of oil-production companies similar Exxon. The oil-drillers are to a greater extent than cyclical together with react to a greater extent than to location crude cost rather than far futures contract prices. The promise is that OIH volition tend to cointegrate amend alongside location crude cost than XLE because of this. The fact that OIH has higher volatility every bit a upshot is non a describe of piece of occupation concern to the arbitrageur (as opposed to the hedger), who profits from high volatility. In whatever case, its volatility should “cancel out” that of the location crude cost together with upshot inwards a spread that may genuinely endure less volatile. I follow their advice together with bear out the analysis of CL vs. OIH.

The plot is of the dollar value of long 1 contract of Cl together with brusque 497 shares of OIH. They create cointegrate alongside over 90% probability. (I besides plotted the 1 criterion departure lines of the spread to facilitate those who desire to expect for gauge entry points.) The cointegration probability is non measurably amend than that betwixt CL together with XLE. However, the electrical flow spread (as of the unopen of November 20) is undervalued past times exclusively $9,617 (or 1.48 criterion deviation), every bit opposed to $10,508 (or 1.74 criterion deviation) for the CL-XLE spread. (I determined the criterion departure of the CL-XLE spread to endure close $6,040). So inwards recent months, ane tin indeed country that OIH is trading to a greater extent than inwards describe alongside location crude cost than XLE. But every bit an arbitrageur who thinks the larger the spread, the bigger the profits opportunity, this is non an endorsement for buying the CL-OIH spread instead. Rather, I would watch adding this spread every bit a agency of diversification.

Thanks, Yaser together with Jim, for this suggestion!