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Oil Services ETF Obvious Beneficiary of Crude Spike

by Tom Lydon

Broadly speaking, there wasn’t much to be excited about in terms of equity market performance last week, but the energy sector didn’t get that memo.

As a result, a broad swath of the related exchange traded funds ranks among last week’s best-performing sector and industry funds, extending gains that already have these funds deep into leadership roles on a year-to-date basis.

On the back of Russia’s armed invasion of Ukraine, oil prices are surging, reminding market participants that the commodity is often correlated to geopolitical tensions, particularly when a major oil-producing country like Russia is involved. Investors are also being remind of oil services’ often intimate correlations to rising crude prices.

Just look at the VanEck Vectors Oil Services ETF (NYSEArca: OIH). The marquee oil services ETF, OIH jumped 3.21% last Friday on above-average volume. That pushes OIH’s year-to-date gain to 41.40%. Underscoring how breathtaking the fund’s recent rally has been, OIH was up “just” 27.28% this year, as of February 10.

Amid calls for the U.S. to increase oil output in a bid to reduce dependence on Russian crude imports, OIH could find further upside catalysts. However, ramping up domestic production will take time, and the North American active rig count actually declined last week. Over the near term, OIH could be propelled higher by strong energy sector earnings.

“Rising oil prices are helping to drive the increase in expected earnings for the Energy sector, as the price of oil increased by 27% (to $95.72 from $75.21) from December 31 to February 28. Earnings estimates for the Energy sector and the price of oil are highly correlated,” notes John Butters, FactSet vice president and senior earnings analyst.

There have historically been material benefits for energy companies by way of higher oil prices. Given the sensitivity of OIH member firms to those higher crude prices, those stocks could be in for some impressive first-quarter results.

“Over the past 20 years, the correlation coefficient between the daily forward 12-month EPS estimate for the Energy sector and the daily price of oil (WTI) is 0.89 (where 1.0 is a perfect positive linear relationship). The Energy sector also recorded the largest increase of in its forward 12-month EPS estimate (+10.6%) of all 11 sectors over the first two months of the quarter,” adds Butters.

Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) combine for 31% of OIH’s roster.

For more news, information, and strategy, visit the Beyond Basic Beta Channel.

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.

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