With often tight correlations to crude oil futures, it is not surprising that oil services exchange traded funds are benefiting this year as oil rebounds. For example, the VanEck Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services exchange traded fund, is higher by nearly 12%.
While production has declined in the U.S., recently rebounding oil prices are encouraging exploration and production companies to revisit spending plans with some increasing capital expenditures. That has some oil market observers concerned about a rising rig count and the subsequent impact on crude prices.
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“The rig count in the highest initial production counties of the Permian Midland continues to march higher and is not far from its 2015 peak.” That’s impressive on its own, but the other thing that’s new is where all these new rigs are concentrated: in high-yield fields. This means that the ramp-up could be pretty significant,” according to Morgan Stanley by way of OilPrice.com.
[related_stories]Rig counts in the U.S. have recently been soaring, putting oil services stocks and ETFs such as OIH in potentially fragile places. The increased spending should benefit oil services providers, but boosted output could force oil prices lower.
Other oil services ETFs include the SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES), iShares Dow Jones U.S. Oil Equipment Index ETF’s (NYSEArca: IEZ) and the PowerShares Dyanmic Oil and Gas Service ETF (NYSEArca: PXJ).
PXJ follows a fundamentally weighted index, which selects stocks based on price momentum, earnings momentum, quality, management action, and value. Importantly, that methodology steers PXJ away from the large weightings to a small number of stocks as is seen in rival oil services ETFs.
“While the U.S. oil-rig count fell 25% from April through June, it climbed by seven last week to 447, marking the third straight rise and the sixth gain out of the last seven weeks. KeyBanc Capital Markets analyst Robin Shoemaker said the rig count is up 10% from its bottom and will be up 10%-15% in Q3,” reports Investor’s Business Daily.
Related: A Very Bullish Call for Oil ETFs
This is a potentially pivotal week for OIH on the earnings front because Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), the world’s two largest oilfield services providers, report earnings. Halliburton reports on Wednesday and Schlumberger follows on Thursday. Those two stocks combine for 36% of OIH’s weight.
