Oye! The price of oil and OIH!
On second thought, I think the way to play this oil correction is still with the oil service companies. Many of the reasons for this are the same reasons we bought SLB. Long term oil production is in decline, more wells in addition to more complicated wells will be drilled in the future etc. etc.
I just took a quick look at the oil services index OIH vs oil price (USO as proxy) and confirmed my suspicion that not only the producers, but also the service companies like SLB haven't participated in the most recent leg up in the oil price. In fact, in the last year OIH has been flat while the oil price has doubled!
Interestingly the short term chart shows that OIH has fell in lockstep with the price of oil!
Short term can oil prices go lower? Probably. But relatively speaking OIH is cheaper than it has been in the last year. Thoughts?
posted by Des @ 7/23/2008 09:59:00 PM
2 Comments:
Now I'm confused!?!?
One explanation why OIH has not kept up with USO/OIL is there is still easy oil to be drilled. Peak oil may be decades away. So in this last leg, OIL has been driven by speculation. Anyways, that's one possible reason for the divergence, but as I said, I'm confused.
From my readings, Peak oil is not decades away. Regardless the easy stuff has been drilled and earnings visibility and earnings growth for these services companies should grow much faster than the general economy.
There was recently a report by the Commodities Futures Trading Commision, which concluded that there was no evidence of speculation driving the price.
http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf
The recent pullback in oil seems to be about fear of demand destruction. Demand destruction is hard to model. Supply shortfalls have been well documented and modelled.
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