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Oil Service Sector Correction Will Send Share Prices Soaring

Oil Service Sector Correction Will Send Share Prices Soaring

Story Highlights

  • The stock market hates the oil service sector right now.
  • Service stocks are at an all-time low.
  • This proprietary ratio shows they need to rise 133% to get to a fair value.
  • There’s an easy way to play this trend today and profit when shares soar.

I can honestly say I’ve never seen anything like this in the oil industry. It’s an extreme low that should correct soon.

And when it does, we’re going to double our money or more.

I’m talking about oil service stocks. These critical companies are being left for dead today — but we can’t do without them.

The oil industry is a whole lot more than just pumping oil out of the ground. It’s a complex web of engineering and machinery to keep natural gas and oil flowing from the ground and into our homes, cars, trucks, planes, ships and more.

The companies that drill the wells, hook up the pipes, analyze the reservoirs and basically keep it all moving are the oil service companies.

Right now, the market hates that sector. And that’s an opportunity for smart investors like us.

Negative Sentiment for Oil Service Companies Keeps Prices Low

The anti-fossil fuel rhetoric is everywhere. Places like Berkeley, California, banned natural gas in new homes. Major cities like Madrid and Paris are starting to ban cars. Even planners in New York City have looked into it.

That pervasive sentiment kept a lid on oil prices, even as we teeter on the brink of war in the Middle East. Ships have been sabotaged in the Strait of Hormuz in the recent past.

That’s a critical piece of the global oil infrastructure.

According to the Energy Information Administration, about 21 million barrels per day flowed through that region in 2018.

That’s about 23% of the world’s oil supply. Britain moved warships into the region. The U.S. moved warships into the region. And Iran seized a British-flagged tanker there.

Yet the price of a barrel of crude oil is just $56. That’s well below its recent high of $76.41 set in October 2018.

And some of the most valuable companies in the world, such as Schlumberger Ltd., Halliburton Co. and National Oilwell Varco Inc., are getting cheaper and cheaper…

Ready Your Portfolio: Oil Service Shares Will Soar

I know prices keep dropping by looking at this simple chart. It shows how many barrels of oil it would take to buy one share of the Philadelphia Stock Exchange Oil Service Sector Index (Nasdaq: OSX).

As you can see, the ratio is at extreme lows since we started tracking it in the ’90s.

Twenty-two years ago, the data showed that the price of one share of OSX was about the same as the price of 3.2 barrels of oil.

Today, the price for one share of OSX is roughly equal to the price of one barrel of oil.

I’ve never seen anything like this. Not even in 2008 did the ratio get this extreme.

The average value is 3.2 barrels of oil per share of OSX. At the current oil price, the value of the OSX Index would have to rise 133% to get back to that value.

That’s what’s coming.

An easy way to play this trend is the VanEck Vectors Oil Services ETF (NYSE: OIH). The exchange-traded fund (ETF) holds some of the biggest names in oil services. When this trend turns, its shares will soar.

Good investing,

Matt Badiali

Editor, Real Wealth Strategist

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