The oil services sector is about to enter its period of seasonal strength. What are prospects this year?
According to EquityClock.com, the oil services sector has a period of seasonal strength from Jan. 15th to May 9th. The trade has been profitable in 18 of the past 21 periods. Average return per period is 17.0 per cent.
Seasonality is influenced by the traditional increase in crude oil and refined product prices during the February to May period as well as an increase in demand for rigs during the winter drilling season.
Prospects are more promising than usual in 2012. The industry recently predicted that spending on oil services will increase by 9.0 per cent in 2012. Gains will come partially from a ramping up of horizontal drilling in North America. Adding to demand is development of offshore fields in Brazil and the South China Sea and a recovery of oil producing facilities in Iraq. Higher crude oil prices are stimulating demand. Crude oil prices on a year-over-year basis have climbed from $90 (U.S.) in January 2011 to over $100 per barrel. Events in Iran could boost crude oil prices further.
Strong fourth-quarter earnings also will help the group. The top 10 companies are expected to record a 16.5 per cent gain on a year-over-year basis. The top 10 companies are Baker Hughes, Cameron International, Diamond Offshore Drilling, Halliburton, Noble Corp., Schlumberger, TransOcean, National Oilwell Varco, Weatherford International and Precision Drilling.
On the charts, the sector is not set up for the seasonal trade yet. The Philadelphia Oil Services Index at 223.28 bottomed early in October at 174.66, quickly moved to 244.54 at the beginning of November and subsequently moved sideways. A move above resistance completes a bullish reversal head and shoulders pattern, a possibility during the 2012 period of seasonal strength. The index remains below its 50- and 200-day moving averages.
Strength relative to the S&P 500 index has been slightly positive since the beginning of October. Short-term momentum indicators currently are overbought. Preferred strategy is to accumulate equities and related exchange traded funds on weakness closer to short-term support at 204.59, after the sector has entered into its period of seasonal strength.
Exchange traded funds that track the oil equipment and services sector include Oil Services HOLDRS , Dynamic Oil and Gas Services and Oil & Gas Equipment and Services SPDRs . A word of caution on Oil Services HOLDRS. The trust is progressing through a restructuring. As a result, liquidity has significantly declined recently.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/