Strong Demand Can Make Oil Services Stocks Outstanding Again

Oil services stocks and the related exchange traded funds had their moments at various points throughout 2021, but those assets are limping to the finish line.

Even with recent lethargy, the VanEck Vectors Oil Services ETF (NYSEArca: OIH) is higher by almost 21% year-to-date, and the king of oil services ETFs could build on that performance in 2022. Of course, oil services stocks and OIH have well-deserved reputations for volatility — the result of tight correlations to crude. More of the same could be in store next year, but at least there’s some demand support.

“Recovering oil demand due to eased pandemic-related restrictions and prudent OPEC+ supply policies have helped oil prices recover to pre-pandemic levels,” says Fitch Ratings. “However, the situation in the oil market remains highly uncertain given the emergence of the Omicron coronavirus variant, which may result in renewed lockdowns and travel restrictions, and may increase price volatility in the near term.”

The Omicron variant of the coronavirus pandemic is likely one reason, if not the primary one, that OIH is scuffling into year-end. However, some experts are speculating that Omicron, through spreading rapidly, is potentially not as severe as previous variants.

If that assessment proves accurate, the outcome could be renewed appetite for riskier assets, including oil and energy equities. Moreover, Omicron proving docile could prompt more travel and fewer restrictions at tourist destinations, potentially fueling upside for oil prices. Furthering the case for OIH in 2022 is some stability in the oil market.

“OPEC+ has been the main stabilising factor in the global oil market since the start of the pandemic and is likely to remain so in the near term, but its policies may become less effective over time as some alliance members (e.g. the UAE and Russia) are considering increasing production to monetise their large reserves,” according to Fitch.

The research firm notes that some major oil-producing nations are likely to boost output next year to take advantage of higher prices, and U.S. production is on pace to continue recovering from coronavirus pandemic lows. That could mean tailwinds are looming for oil services stocks and OIH.

“We anticipate demand will continue to improve in 2022, assuming new lockdowns will be shorter and less severe than those in 2020. The recovery might reverse if Omicron or other potential new variants prove significantly more infectious or dangerous, leading to new prolonged synchronised lockdowns,” concludes 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.