Energy producers have tightened their belts as oil prices plunged, trimming trillions of dollars from future projects and putting added pressure on the oil services companies, along with related exchange traded funds, that cater to the industry.
The oil services sector has been underperforming integrated oil companies and could continue to fall behind. Over the past year, the Market Vectors Oil Service ETF (NYSEArca: OIH) declined 42.4%, iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) decreased 42.6% and SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) plunged 53.1%. Meanwhile, the Energy Select Sector SPDR (NYSEArca: XLE) retreated 30.9% over the past year.
About $1.5 trillion of potential global investment, including money that could go into North America’s shale oil boom, is “out of the money” at current oil prices close to $50 per barrel and is unlikely to go ahead, reports Christopher Adams for the Financial Times.
With low oil prices pressuring oil producers’ bottom line, industry experts expect capital spending on new projects to decline by 20% and 30% on average, according to Wood Mackenzie, an energy consultancy. The consultant calculated that about $220 billion in investments have been cut so far, or $20 billion more than previously estimated two months ago, after the recent price declines.
West Texas Intermediate crude oil futures were hovering around $46.5 per barrel Monday while Brent crude oil futures were trading at about $48.7 per barrel.
The U.S. shale oil industry has reacted the fastest to the market shift where “deep cuts” in North America account for over half of a 45% fall in capital spending across the Americas.
“The flexibility to rapidly dial back investment in unconventionals at low prices has provided a competitive advantage for the US independents with the bigger positions,” according to a recent study. “Majors and international players lack exposure to this flexible investment.”
Oilfield service suppliers that provide equipment like drilling rigs will be among those hardest hit. Consequently, the oil services-sector ETFs may likely be among the worst performers in energy-sector during a low oil environment. For instance, IEZ includes a 78.4% tilt toward oil, gas equipment and services sector, along with 20.0% oil and gas drilling.
Order books for services have experienced a “steep decline” from the fourth quarter of 2014, with the backlog of business now running to two or three quarters.
For those seeking a hedge against further weakness in the energy sector, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index. The UltraShort Oil & Gas ProShares (NYSEArca: DUG) takes two times the inverse, or -200%, daily performance of the Dow Jones U.S. Oil & Gas Index. The Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) reflects three times the inverse, or -300%, daily performance of the energy select sector index. Moreover, the recently launched Direxion Daily S&P Oil & Gas Exploration & Production Bear Shares (NYSEArca: DRIP) takes the -3x, or -300%, daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. [New ETFs for the Bold Energy Investor]
For more information on the oil industry, visit our energy category.
Max Chen contributed to this article.