Oil prices have rebounded to the $82 per barrel range, but the
action in the shares of the Oil Service HOLDRS Trust (NYSE:
OIH) suggest that prices could move higher.
Chart Courtesy of StockCharts.com
It's been a long time since we've written about the oil sector.
But, things seem to be perking up again. After the BP oil
spill, money has been coming back into these stocks, and
the relationship between the stocks and the commodity has
returned to what is considered normal in the market.
Simply stated, oil and oil service stocks traditionally rally before the price
of oil moves higher. And as the rally in oil is stuck, just above $80, the action
in the oil service stocks is suggesting that this could be the beginning of a
bigger move in the complex.
What we're seeing is that even as crude consolidates, money is still moving into
the oil service stocks, and some of the exploration stocks, such as Anadarko
(NYSE: APC). (Dr. Duarte owns shares in APC). In fact, OIH has just started breaking
away from a two month basing formation, having crossed above its 20 and 50-day
moving averages, and seems to be headed for a test of 110, near its 200-day line.
Part of the reason for the rally seems to be the threat of potential damage to
oil rigs in the Gulf of Mexico from hurricane season. This is fairly standard
seasonal behavior. But, a move above 115 for OIH may mean something more, such
as traders starting to factor in some kind of increase in demand for crude, or
the need for more exploration, or of a different kind of exploration in response
to the way things worked out for BP in the Gulf.
It's not clear, just yet, as to what the reason may be. But it is clear that
things seem to have made an intermediate term trend in this area of the market.
To be sure, short term events, such as a surprise of some sort on the employment
report could either accelerate or reverse this still young trend change. But,
after the dust clears, energy may become a leader in this market once again.
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In early 2001 Dr. Duarte in "Successful Energy Sector Investing," correctly predicted that Venezuela's political problems could lead to an energy crisis in the United States.
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