ETF Trends
ETF Trends

The Market Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services exchange traded fund, jumped 3.5% last week, but significant reductions in industry spending loom large over OIH and rival oil services ETFs.

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]

“Schlumberger, the world’s biggest oil-services company, last month reported a near halving of its third-quarter profit as revenue fell 33% from a year earlier. Halliburton, whose tie-up with Baker Hughes could be completed in December, swung to loss in the third quarter, reports Selina Williams for the Wall Street Journal.

Schlumberger “CEO Paal Kibsgaard expressed serious concerns about the near-term future when the company released its third quarter financial results on October 15. Schlumberger works in every market in the world in which it is permitted to operate. Therefore, “Big Blue” enjoyed some continuation of activity in various markets compared to North America where, when oil prices declined, operators demonstrated their ability to begin closing the spending taps almost immediately,” reports OilPrice.com.

“Next year could be even worse. With oil producers pulling back more than $200 billion in spending this year and next, Scotland-based energy consultancy Wood Mackenzie expects only 10 new projects globally to garner investment commitments. This would compound problems for the oil-field services sector, which has the capacity to support an average of 40 to 50 new energy projects a year,” according to the Journal.

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.