Pressure Lingers for Oil Services ETFs | ETF Trends

Oil services ETFs, including the VanEck Vectors Oil Services ETF (NYSEArca: OIH), are often highly correlated to the price of oil, meaning the group has been under pressure amid this year’s wilting oil prices.

OIH seeks to replicate as closely as possible the price and yield performance of the MVIS® US Listed Oil Services 25 Index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the oil services sector. Such companies may include small- and medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

“Exploration-focused oilfield service (OFS) companies will face the largest demand decline as a result of oil and gas producers cutting their capex and operating expenditure, followed closely by drillers,” said Fitch Ratings in a recent note. “The impact will be felt across the entire OFS sector, but diversified companies and service providers working in regions with low breakeven oil prices are better-placed to withstand the downturn.”

The expected global supply glut is also the latest threat to the Organization of the Petroleum Exporting Countries and other producers, which have already enacted production caps in an attempt to stabilize prices and balance the market.

Supply Issues

At the Joint Ministerial Monitoring Committee meeting Wednesday, the Organization of the Petroleum Exporting Countries and allied producers said they will limit record production cuts of 9.7 million barrels per day to 7.7 million barrels per day beginning in August through the end of the year amid possible signals of amelioration in the oil market.

Iraq, who was not able to fully comply with the cuts in May and June will make adjustments to offset for the added output. Including that compensation, Saudi Energy Minister Prince Abdulaziz bin Salman said actual curtailing of supply will reach almost 8.1 million to 8.2 million barrels per day. An OPEC+ document seen by S&P Global Platts, however, revealed that 13 countries pumped above their quotas in the first two months of the deal by a combined 840,000 barrels per day.

Declining exploration budgets are another factor weighing on oil services providers this year.

“The largest cut in oil and gas producers’ capital programs will be in the exploration segment, which we expect to reduce by 20%-30% in 2020 yoy. We expect this will reduce funds from operations (FFO) of PGS ASA, a global marine seismic company focusing on the offshore segment, by more than half. This has renewed pressure on the company’s liquidity and led us to downgrade its rating to ‘CCC’ on 27 April 2020, despite a successful refinancing in February 2020,” according to Fitch.

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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.