Market Overview

Oil Service Stocks (BP, OIH)

Oil Service Stocks BP, OIH

BP (NYSE: BP) is down over $3 today after a 2 day rally saw it climb to over $34 per share Friday. The low from June 9 was $29.00 and came on incredible volume. The next day the stock rallied on nearly as much volume giving the potential indication for a climactic sell off and possible rally. We believe the overall climate in BP and oil service stocks has likely been significantly impacted by the April explosion and ongoing oil spill in the Gulf of Mexico. The state of Florida already has sued for billions of dollars to be moved to escrow to offset the substantial impact on tourism. This spill has become a political hot button and will likely impact government regulations on the industry as well.

The outlook for the U.S. offshore drilling business was positive prior to the BP oil spill but has no doubt been impacted. The government was planning to allow certain new areas to be drilled and was taking a more open minded approach to potential expansion of drilling programs. That is clearly off the table now and will possibly even lead to the other extreme. It will be important for traders and investors to have a basic understanding on the outlook for the industry to determine if there are opportunities being created by the selling in the stocks. Demand has been weakened dramatically by the six month moratorium on drilling and there will undoubtedly be political pressure to extend this even further. It is important to recall that different sides of this debate have agendas and they will use the disaster as an opportunity to further their own agenda. There are also mid-term elections approaching in November.

The offshore drilling industry keys off “day rates” which is the daily rental the rig operators charge the exploration companies to use the rig to drill for oil. Over the past decade technological advances have been utilized to begin drilling deeper and deeper off shore. Naturally the more complicated the drilling operation the higher the day rates that are charged. Day rates move up and down with supply and demand and the rig operators spend a lot of their time determining the best allocation for implementing their fleet of rigs in the field. The drillers do maintain some exposure to contracts being cancelled, particularly if there is a government action which forces the stoppage in drilling programs. This will impact the bottom line of the drilling companies.

Oil Service HOLDRs (NYSE: OIH) is the ETF that tracks the oil service stocks and offers good volume, range and volatility for trading. It traded at $134 on April 26 and has steadily declined much faster than the overall market bottoming at 89.48 on June 1. The markets sentiment to the entire industry has soured making determining winners and losers in the area difficult as a negative perception has blanketed the entire industry. As the OIH has rallied back to the 100 area today Monday June 14, it is challenging its 20 EMA for the first time since early May. It is a great vehicle for day trading but the intermediate trend may be more difficult to follow right now. This could turn into a brief rally before more down trend resumes or could be the beginning of a long bottoming process. The attitude of other countries, in addition to the U.S. will have a big impact on the overall supply demand picture for drilling programs and the impact on day rates. There have been many energy related disasters in the past and they typically pass in time and the industry recovers and likely will this time also. One other side issue may be a resumption of the interest in alternative energy sources and potential government backing for those.


*Past performance is not indicative of future results. There is a risk of loss in trading.


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