It’s Seasonal: Drill, Baby, Drill

Posted by Don Vialoux - Timing the Market

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The U.S. Oil Services Sector: Drill, Baby, Drill

The U.S. Oil Services Sector has a period of seasonal strength from the end of January to the end of May. Will the sector move higher again this year?

The U.S. Oil Services sector as a sub-sector of the Energy sector has often been described as “The energy sector on steroids”. Share prices of energy stocks are amplified in the oil services sector. Both sectors have a history of moving higher from February to May. During the past 13 periods, the Philadelphia Oil Services Index has gained in 11 periods for an average gain per period of 15.4%. Seasonality in both sectors is influenced by rising crude oil and refined product prices during the February to May period.

Prospects for the oil services industry are exceptional this year. A recent Barclay’s survey of 402 oil companies showed that the oil industry is planning to spend $490 billion on projects in 2011, a gain of 11% over 2010. The planned increases reflect higher crude oil prices as well as higher costs of finding and extracting oil in harder to access areas. Large projects currently under development are located offshore Western Australia and the South China Sea. The largest project is located offshore Brazil. Petroleo Brasiliero SA has budgeted $28.2 billion for capital costs related to development of its deep water oil fields off Brazil’s Atlantic coast.
Demand for deep water rigs continues to grow despite the drilling moratorium in the Gulf of Mexico and despite another 25 new deepwater rigs that came on stream in 2010. Another 35 rigs are scheduled to be built in 2011.

New technologies in the industry are also driving revenue and earnings. Most notable has been the rising demand for rigs capable of horizontal drilling used to produce shale gas.
On the charts, the sector has been a stellar performer since last September. Intermediate trend remains up. The Philadelphia Oil Services Index trades well above its 50 and 200 day moving averages. Short term momentum indictors are overbought, but have yet to show technical signs of peaking. Preferred strategy is to purchase the sector on weakness in the month of February.

The easiest way to participate in the sector is to own Exchange Traded Funds (ETF) that hold a diversified portfolio of international oil service stocks. Oil Services HOLDRs (OIH) is the most actively traded ETF. Other liquid ETFs include Dynamic Oil and Gas Services (PXJ) and Oil and Gas Equipment and Services SPDRs (XES).

Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at and Follow us on Twitter@EquityClock.