SECTOR WATCH: Oil Service Stocks Rally as Crude Prices Bounce Higher

Crude oil prices rose Wednesday morning after the latest data from the Energy Information Association [EIA] showed crude oil and gasoline stockpiles falling more than twice the expected amount. The latest report showed crude oil inventories falling 3.5 million barrels to 333.6 million barrels. Analysts were looking for a draw of 800,000 barrels. Meanwhile, gasoline stockpiles lost 3.6 million barrels to 192.6 million. That compared to analyst estimates for a 1.8 million draw. 

The main concern now is that supply is low, especially for gasoline heading into the busy travel period during the forthcoming Labor Day weekend. At current levels, gasoline stockpiles cover just 20 days of demand, which is the lowest level on record.

In addition, some energy traders are keeping an eye on a tropical weather disturbance in the Atlantic basin. According to recent reports, the system could develop into a strong storm or even hurricane and disturb energy instillations if it moves into the Gulf of Mexico. Also lending support to crude oil prices were comments out of Venezuela Wednesday. Officials noted that, while worried about financial problems in the US economy, they do not see a major effect on oil demand from credit problems. As a result, OPEC should keep output stable.

In all, the day’s news conspired to send energy prices sharply higher Wednesday. October crude on the New York Mercantile Exchange [NYMEX] rose $1.76, or 2.75%, to $73.49 a barrel. Gasoline (September) jumped 8.7 cents, or 4.3%, to close at $2.10 a gallon. Heating oil (September) gained 4.67 cents, or 2.4%, to $2.043 a gallon.

The jump in energy prices helped fuel a rally in the companies that drill for the stuff.  For instance, Schlumberger () rose $4.41, or 4.83%, to $95.72 a share, Baker Hughes () rose $2.5, or 3.14%, to $82.19, and Diamond Offshore () jumped $4.64, or 4.71%, to $103.18.

The Oil Service HOLDRS, which holds a basket of drilling companies, gained $5.97, or 3.5%, to $176.47 a share. In the process, it rose to its best levels since July 31 and, as we can see from the chart below, broke above resistance near $175-$176 a share. OIH had tried, but failed, to break above that price level several times this month. Each attempt was rejected. Now, however, the fund is breaking to its best levels of August and has also recovered a big chunk (62%) of the losses suffered from mid-July to mid-August.

Figure 1: Oil Service HOLDRS

The improvement in the Oil Service HOLDRS might have bullish implications for crude oil prices as well because the OIH has been a leading indicator during the past turning points. For example, from figure 2, we can see that the fund turned lower before crude oil this summer. However, the OIH also turned higher before crude oil prices in January 2007 (not shown on chart). Therefore, the recent rebound in the drillers is perhaps giving another reason to expect higher crude oil prices from here. 

Figure 2: OIH and Spot Crude Oil

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum