Time to Revisit Oil Services ETFs?

Exchange traded funds tracking oil services stocks are among the most highly correlated equity-based energy ETFs to oil prices. As such, oil services ETFs are also among the most volatile energy funds, but it might be time for investors to not be afraid of that volatility.

That volatility is highlighted by the Market Vectors Oil Service ETF (NYSEArca: OIH) and other oil services ETFs. Year-to-date, OIH is down about 10.6%, but over the past month, the fund has surged by the same amount.

With oil prices still low, major oil producers have been aggressively cutting back costs to muddle through the lean times. For instance, Exxon Mobil (NYSE: XOM) has cut its drilling budget to a 10-year low and halted share buybacks after last year’s measures failed to counter a crash in energy prices, reports Joe Carroll for Bloomberg.

Exxon stated it will curb spending on rig leases, floating oil platforms, gas terminals and other projects by 25% this year to $23.2 billion, the lowest spending plan since 2007. The steepening cuts come off a 20% reduction in spending to $31 billion on drilling, floating platforms and gas-export terminals, compared to previous expectations of a 12% cut in spending last year.

“The oil service sector’s performance is still highly correlated with crude prices, which have fluctuated from $62/barrel to $26/barrel over the past 12 months. Diversified service companies are well positioned in this cycle and we would “embrace the volatility” and use short-term dips in crude as opportunities to increase exposure, becoming more aggressive with the severity of the pullback,” according to a D.A. Davidson note posted by Johanna Bennett of Barron’s.