The VanEck Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services ETF and a fund that is heavily allocated to the industry’s biggest names due to its cap-weighted methodology, is off 26% year-to-date, underscoring the vulnerability of this industry to sliding oil prices. Some analysts are expressing concern oil services stocks will remain depressed over the near-term.
Other oil services ETFs include the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) and the PowerShares Dyanmic Oil & Gas Services Portfolio (NYSEArca: PXJ). The SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES), an equal-weight spin on oil equipment and services stocks, has plunged almost 32% this year.
“Barclays lowers its outlook on North American oilfield services to Neutral, a day after cautioning investors to expect ongoing depressed sentiment among North American integrated oil majors, as ‘stubborn’ global imbalance weighs on shares,” according to Seeking Alpha.
OIH tracks the 25 largest oil services companies in the space. Both XES and IEZ track a slightly broader 37 components, but XES follows a more equal-weight indexing methodology that favors midsized companies while IEZ reflects a traditional market cap-weighted indexing methodology. Lastly, PXJ follows a fundamentally weighted index, which selects stocks based on price momentum, earnings momentum, quality, management action, and value.
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels.
Related: Key Levels for Big Energy ETFs
While demand has yet to catch up to elevated supplies, rebounding economies in Europe and steady economic growth in the U.S. could at least keep oil prices steady around current levels in the second half of 2017.
“Amid the pessimism around the majors, Barclays remains more positive on the market outlook 12-18 months out,” notes Seeking Alpha.
If crude oil prices rebound, shale hydraulic fracturing companies could increase spending on exploration and production this year, supporting further gains in energy services-related exchange traded funds.
For more information on the oil market, visit our oil category.