The U.S. Oil Services Sector
The U.S. Oil Services sector has a period of seasonal strength from February to mid May. Will the sector move higher again this year?
Seasonal Influences
According to a recent seasonality study by Brooke Thackray, the U.S. oil services sector has a period of seasonal strength from January 31st to May 9th. The trade has been profitable in 17 of the past 20 periods. Average return per period was 14.2 percent. Return from the sector during its period of seasonal strength exceeded return from the S&P 500 Index by 11.0 percent.
Seasonality is influenced by rising crude oil and refined product prices during the February to May period as well as an increase in the demand for rigs during the winter drilling season. Following is a chart showing seasonality in the U.S. Oil Equipment and Services Index during the past 20 years.
Technical Influences
Oil Services HOLDRs currently have a mixed to mildly positive intermediate technical profile. Intermediate trend is up. The Exchange Traded Fund moved below its 50 day moving average this week, but remains above its 200 day moving average. Short term momentum indicators are oversold. Support is indicated at $110.43 and its 200 day moving average at $110.82. Resistance is indicated at $134.45. Strength relative to the S&P 500 Index has been positive since the first week in December.
Fundamental influences
Fourth quarter earnings reports released to date by companies in the sector have recorded significant earnings declines, but have beat consensus estimates. Schlumberger and Halliburton quickly came under profit taking pressures following release of results.
Prospects for 2010 are encouraging. Year-over-year earnings comparisons are expected to turn positive in the third quarter. Gains will come from a ramp up of horizontal drilling in gas prone shale areas, drilling and development offshore Brazil and expansion of Middle East capacity. Notable will be an increase in development in Iraq.
The Bottom Line
The seasonal trade in the Oil Equipment and Services sector is lining up nicely this year. A technical entry point has yet to arrive, but is expected to occur shortly. Oil Services HOLDRs is the most actively traded Exchange Traded Fund in the sector. Other liquid ETFs in the sector include Dynamic Oil and Gas Services (PXJ) and Oil and Gas Equipment and Services SPDRs (XES).
Disclaimer: This article was originally published in the Financial Post section of the National Post on February 6, 2010 by Don Vialoux. Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Stocks mentioned in this post: PXJ, XES
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