Is This The Best Way To Play The Plunge In Oil Prices?

One of the things on which I pride myself when writing here, or elsewhere for that matter, is that I don’t run away and hide should I make a bad call. Dealing room life taught me to own my mistakes, an essential thing to do if you are going to cut, take a small loss and move on to the next opportunity. So, I will freely admit that I have got crude wrong in my last couple of calls. I was bearish on the run up to $95 and bullish, looking for a bottom, on the way down. That, though, is behind me. I have taken a couple of small losses, and with crude at around $75, somewhere close to its average price for the year, I’m now looking forward and considering how I can trade that.

My misreads over the last few weeks make me a bit reluctant to take a view on crude at these levels. I have been prioritizing demand when the market has been focused on supply and vice versa, leaving me a bit confused and needing to reevaluate things. So, I have been thinking about who, with the holiday season approaching, can benefit from the reversion to the mean in oil, and have arrived at a conclusion that doesn’t give me any pleasure…airline stocks.

For background, like any rational person who has traveled by air in the last year or so, I hate airlines with an almost embarrassing passion. That is not just because they have made flying in economy such an unpleasant experience by nickel and diming customers to death, nor that their “flex pricing” seems to mean just ever more expensive tickets, nor even because they seem incapable of departing and arriving on time and even if they do, it will be without your luggage, that you, of course, paid extra to put on the plane. No, what bothers me the most is that as businesses, they have so often behaved irresponsibly, with massive salaries and bonuses for executives and reckless spending in good times, then socialized their losses in bad, either by declaring bankruptcy or taking taxpayers’ money to stay afloat.

As I said, supporting airlines by buying their stock is not something I do lightly, but the case for them at these levels is just too strong to ignore.

As 2023 draws to a close, the one word that almost all market watchers seem to be employing is “uncertain”. There is uncertainty about US interest rates, and as a result about the US and global economies. Then with that as a backdrop, there is uncertainty about how much pain consumers can take. So far, even as rates have soared, Americans have kept on spending, but CEOs of consumer-facing companies have generally been cautious about the next few months during the earnings season that is just ending. There is, however, one area where spending has generally held up: travel and entertainment. Whether because of Covid or just a shift in priorities of the maturing generation, experiences are now prioritized over things, and getting to most of them, in America at least, means paying money to the airlines.

Stocks in the industry, though, have been under pressure. That is in part because they were a bit overvalued in the early part of this year, in part because of rising interest rates, and in part because of the strength in oil, which increases airlines’ costs significantly. That can be seen in the 1-year chart for the US Global JETS ETF (JETS), but that chart also shows a bounce back forming over the last couple of weeks.

From a chart reading perspective, that looks a bit like a dead cat bounce, but the shifts in fundamentals for airlines makes it look more like a real bottom and reversal. Economic data in the US have made another hike look much less likely, this year at least, and as mentioned, oil has pulled back to somewhere around its average for the year. With the holiday season approaching, when Americans typically travel to be with family, and the possibility of travel focused holiday gifts, the end of the year could well be good for airlines…or at least nowhere near as bad as the drop in the stocks would indicate.

Believe me, buying stocks in US airlines is not something I do lightly. Typically, I like to buy the shares of companies who I see as well run and stable and, historically, airlines have been neither of those things. However, when it comes to trading, money matters more than my feelings so, with oil trading at more than 20% below its high point for the year that was hit in September and economic conditions that suit their business, I am holding my nose and buying airline stocks right now.