OIH - The Prospects For The VanEck Oil Services ETF (OIH)

Summary

• Crude oil and product prices have recovered after a significant decline from the 2022 high.
• Geopolitics could continue to cause price upside spikes. OPEC is in control, and Chinese demand could come storming back.
• The U.S. SPR sales in 2022 will support the energy commodity in 2023 - $70 could be a line in the sand on the downside.
• Oil and gas continue to power the world - The demand for oil services companies remains robust.
• OIH is a diversified oil services ETF product with a lot of upside potential.

Oil and gas are traditional boom-and-bust markets. In April 2020, nearby NYMEX crude oil futures fell to a record low at negative $40.32 per barrel, the first time the U.S. futures declined below zero. Those holding long positions in the nearby NYMEX futures had to pay a steep price for buyers to take the petroleum off their hands with no storage capacity in sight. NYMEX WTI petroleum is a landlocked crude oil that travels via pipelines to storage tanks and ports.

Meanwhile, Brent North Sea Crude oil, a seaborne petroleum, also experienced a price plunge, but it only fell to $15.98 per barrel, the lowest price of this century. In June 2020, nearby NYMEX natural gas dropped to $1.44 per MMBtu, the lowest price in a quarter of a century. The first half of 2020 was a bust for hydrocarbon prices as the global pandemic gripped markets across all asset classes, and energy demand fell off the side of a bearish cliff. Coal for delivery in Rotterdam, The Netherlands, and Newcastle, Australia, fell to respective $38.45 and $48.40 per ton lows in 2020, rounding out the fossil fuel carnage.

Obviously, 2020 was a lousy year for companies involved in servicing the fossil fuel industry. The VanEck Oil Services ETF product ( OIH ) that holds the leading oil and gas-related servicing companies plunged to $66 per share in March 2020. In February 2012, OIH split three for one. The next split went the other way, and in April 2020, the ETF experienced a reverse one-for-twenty split. While OIH traded to a split-adjusted $66, the pre-split price reached a $3.30 per share low.

As the three-year anniversary of the energy carnage approaches, OIH is above the $325 per share level and could continue to move higher in 2023.

Crude oil and product prices recover

Nearby NYMEX WTI crude oil futures fell to a $70.08 per barrel low in early December 2022.

The chart highlights the recovery to over the $81 per barrel level on January 26.

Brent North Sea crude oil futures rose from $75.11 in December 2022 to over the $87.60 level in late January 2023.

NYMEX gasoline futures rose from $2.0204 late last year to over the $2.60 per gallon wholesale level.

Heating oil futures, a proxy for distillate products like jet and diesel fuels, rose from $2.7647 in December 2022 to over $3.30 per gallon wholesale on January 26, 2023.

While crude oil and oil product prices remain far below the 2022 highs, they have turned higher, and the short-term trends are bullish in late January 2023.

Geopolitics could continue to cause price upside spikes

Three geopolitical factors threaten to ignite petroleum and oil product prices higher in early 2023:

• U.S. Energy Policy - After the 2022 mid-term elections, a reporter asked U.S. President Joe Biden if anything would change after Republicans captured control of the House of Representatives. His answer was “ nothing ,” meaning the administration will remain on its greener energy policy path. Support for alternative and renewable energy and inhibiting fossil fuel production and consumption has been the hallmark of the Biden administration. No change in energy policy diminishes the U.S.’s pricing power and enhances OPEC’s, the international oil cartel, ability to influence global oil prices. OPEC’s mission is to achieve the highest possible price for its members.
• The war in Ukraine and Russia’s influence in OPEC - Russia has two reasons to push oil prices higher, to punish “ unfriendly ” countries supporting Ukraine, and to increase revenues supporting its war efforts. Crude oil has become an economic weapon for Moscow against the west. This week’s news that the U.S. and NATO are sending additional tanks and weapons to Ukraine only increases the potential for Russian retaliation.
• The end of Chinese COVID-19 protocols - China is the world’s second-leading economy and most populous country. As Beijing emerges from its COVID-19 protocols, energy demand will likely soar, putting additional upside pressure on crude oil’s fundamental equation.

Meanwhile, seasonality is likely to push crude oil and oil product demand higher over the coming weeks and months. As the US, Europe, and Asia move out of the winter, gasoline and distillate demand will rise. The continuous gasoline crack spread increased from $13.62 in December to $28.87 per barrel on January 26. The continuous distillate refining spread rallied from $43.41 in December to $57.62 per barrel on January 26. These spreads are real-time indicators of petroleum demand, and the rallies are a bullish factor for oil prices in early 2023. Moreover, if the conflict in Ukraine spreads west, the potential for sudden and dramatic oil price spikes upward remains a clear and present danger.

The U.S. SPR sales in 2022 will support the energy commodity in 2023

At the beginning of 2022, the U.S. Strategic Petroleum Reserve held around 595 million crude oil barrels. As of January 20, the SPR dropped 37.5% to 371.6 million barrels, the lowest level since December 1983. The Biden Administration released and sold from the SPR to control runaway prices throughout 2022. Some of the barrels went to China. With stockpiles at a nearly four-decade low, the administration has stated it would seek to replace the barrels sold at an average of $96 at the $70 level on nearby NYMEX futures. Meanwhile, the December low was $70.08 per barrel. The bottom line is that the U.S. remains a lurking buyer of crude oil to replace its national reserves, and OPEC, with Russian influence, OPEC will likely do its utmost to prevent the price from falling to that level.

A recent Congressional proposal to tie future SPR sales to increasing U.S. drilling and output fell on deaf ears at 1600 Pennsylvania Avenue. The bottom line is weakness in the crude oil market will lead to SPR buying. With the price below the average selling level, the administration could increase its purchase targets, establishing a higher base for the energy commodity.

Oil and gas continue to power the world - demand for oil services companies remains robust

Addressing climate change is a noble cause, with many environmentalists and companies pushing for zero carbon footprint initiatives. However, China and India remain the home to over one-third of the world’s population, and they have no plans to curb their enthusiasm for fossil fuels, which continue to power our planet.

Try an experiment in any city in the U.S. Stand on a street corner and count the number of EVs and hybrids vs. gasoline-powered vehicles. In the U.S. and worldwide, gasoline continues to power most automobiles and trucks. The trend in the oil services sector supports the notion that oil and gas will remain critical fuels in the short and medium term.

The chart shows the five-fold rise in the VanEck Oil Services ETF product since the March 2020 low. In 2022, OIH rose 64.5%, outperforming all the leading stock market indices and the XLE ETF, which posted a 57.6% gain. OIH closed at $304.05 on December 30, 2022, and at $329.49 per share on January 26, the ETF was already 8.37% higher in under one month in 2023.

OIH is a diversified oil services ETF product with lots of upside potential

The top holds of the OIH ETF include:

Schlumberger, ( SLB ), Halliburton ( HAL ) and Baker Hughes ( BKR ) account for 39.28% of OIH’s holdings. The current $2.89 dividend translates to a 0.88% yield for the ETF with $2.88 billion in assets under management. OIH charges a 0.35% management fee.

After the April 2020 one-for-twenty reverse split , OIH could have lots of room to move higher or experience a stock split that goes the other way.

The long-term chart highlights the first upside technical target stands at the May 2018 $597.30 high. The split-adjusted record peak was in July 2008 at $1,525 per share.

Crude oil and fossil fuels continue to power the world, and that will not change over the coming months and years. The demand for petroleum and oil products will support the leading oil services companies. OIH has come a long way from the March 2020 low that caused the reverse split, but it could have lots of upside room over the coming months and years. The trend is always your best friend in markets across all asset classes, and it remains higher in OIH in late January 2023.

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