Oil Services ETF May Have Upside on Production, Supply

April 16th at 3:00pm by Tom Lydon

Oil service providers are in position to benefit from current production rates that are only slightly registering above consumption. As geopolitical tensions continue to be an obstacle to oil production, related exchange traded funds are a way to invest in rising oil prices.

“We think the integrateds are also beginning to benefit from major project development in deepwater, LNG and unconventional resources over the last few years, enhancing near-term and long-term production growth visibility. The most apparent stumbling block to production growth appears to us to be the possibility that high oil prices could impact production sharing contracts and lead to lower volumes, as we saw in some cases in 2011,” Michael Kay, S&P analyst wrote, reported by MarketWatch.

Geopolitical tension in the Persian Gulf and a possible closure of the Strait of Hormuz has ignited fear over a global shortage in oil supply. Big-name oil producing countries have about an average of 2 million barrels per day of excess supply, with global oil demand currently at 75 million barrels per day, reports Abraham Ballin for Morningstar, in a recent article. [Energy ETFs Rally After Oil Spill Findings]

In the event of a production shortage, oil prices have the potential to climb higher. When oil prices rise, mega companies such as Exxon Mobile (NYSE: XOM) and Chevron (NYSE: CVX) expand drilling operations and create demand for rigs and drilling services. Overall, crude prices and speculation of rising demand are a barometer for oil service and production performance. [ETF Chart of the Day: Oil Services]

Market Vectors Oil Services ETF (NYSEArca: OIH) tracks the performance of the U.S. oil-equipment and -services sector. This ETF gives exposure to some of the industry’s largest players, however, the cyclical nature of the commodity markets influences its performance.

For the short-term, stunted global growth could hinder demand for crude and keep prices low. Emerging markets growth will continue to be the driver of major oil demand and consumption, with major developing markets such as China consuming all of the new crude production. [ETF Chart of the Day:Oil and Gas]

Market Vectors Oil Services ETF


Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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