The Market Vectors Oil Service ETF (NYSEArca: OIH) and other oil services ETFs are notoriously correlated to oil prices, but that correlation has been paying off for investors. Confirmation of that sentiment comes by way of OIH’s year-to-date gain of nearly 23%.
Making OIH’s 2016 resurgence all the more impressive is the fact U.S. shale producers have cut production while giant U.S. oil companies have not been shy about taking the knife to their exploration and production plans.
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 recent strength displayed by oil services stocks and ETFs like OIH has some pondering how long the good times can keep going.
[related_stories]“Note that while the trend has been decidedly lower since oil and oil services stocks topped out in the summer of 2014, a real breakdown below multiyear support did not occur until last summer. After exhausting this swan dive, the OIH then began to bounce in January, and while overbought in the nearer-term, a possible upside target from this bigger picture view may well be the horizontal line (in other words, former support becomes resistance),” according to InvestorPlace.
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.
“Tuesday’s 3.5% rally managed to push the OIH back above diagonal resistance that stretches back to 2014, which now puts the red 200-day MA on the map as a next upside target. This moving average currently resides around $28.40 area, and if targeted, would mean another 5% or so of upside for active investors and traders to sink their teeth into,” adds InvestorPlace.
Market Vectors Oil Services ETF
