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]