Previously downtrodden oil services exchange traded funds have enjoyed the recent surge by crude oil futures. For example, the Market Vectors Oil Service ETF (NYSEArca: OIH), one of the most widely followed oil services ETFs, has soared almost 15% in just the past week.
OIH’s recent rebound is impressive when considering the mammoth headwinds afflicting oil services stocks this 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.
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.
There are some positive catalysts, though. While there are still concerns that Halliburton (NYSE: HAL) will not be able to complete its acquisition of rival Baker Hughes (NYSE: BHI), August’s deal-making in the oil services space predictably touched-off speculation that more oil services firms are ripe takeover candidates. [More M&A for Oil Services ETFs]
OIH “remains below important horizontal support (from a longer-term perspective). The price action since the 2014 top, however, increasingly looks to have taken the shape of a falling wedge pattern that now is trying to resolve to the upside,” according to TradingFloor.com “On the daily chart we see that Tuesday’s 4.66% rally in OIH has pushed it above the downtrend line since May as well as above the yellow 50-day moving average.”
“The subdued pricing environment, with crude hovering near the low $40s, will force the exit of marginal producers and lead towards industry consolidation with bigger, well established companies buying the weaker ones, just as we’ve seen in every oil cycle over the last three decades. Schlumberger’s purchase should give confidence to other oil service companies who’ve been patently waiting for acquisition opportunities,” according to Half Bridge Business Review.
Market Vectors Oil Services ETF
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.