Energy ETFs Had a Fairly Good Week: Last Week's Key Trends
(Continued from Prior Part)
The Market Vectors Oil Services ETF
The Market Vectors Oil Services ETF (OIH) gained 1.14% in the week ended August 14. This ETF tracks an index of the top 25 US-listed oilfield equipment and services (or OFS) companies. OIH is a good proxy for playing energy prices because OFS companies’ fortunes tend to be closely linked to those of upstream, or E&P (exploration and production), companies.
Comparing performances
So OIH should mirror the performance of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks an index of predominantly upstream E&P companies. In the week ended August 14, however, XOP rose 5.21%. OIH rose less than XOP at the end of the week, as you can see in the chart above. Please refer to the previous part of this series to find out more about XOP’s performance.
As we noted earlier, the United States Oil Fund (USO) fell ~3.91% while the United States Natural Gas Fund (UNG) rose 0.3% in the week ended August 14. These commodity ETFs track changes in prompt futures prices.
OFS companies, as their name suggests, provide equipment and services that help E&P companies extract energy, which can range from resource analyses even before a well is drilled to drilling and energy transportation equipment.
As upstream companies expand operations, OFS companies stand to gain. The opposite is also true. So, even though OFS companies tend to have longer-term contracts with upstream companies, any strength or weakness in upstream stocks quickly flows to OFS stocks. Another sector that benefits when upstream companies expand operations is the MLP sector, which includes companies like Magellan Midstream Partners (MMP).
About OIH
OIH tracks a capitalization-weighted index. As we saw with XLE in Part 1 of this series, OIH can also be prone to dominance by a handful of large companies. Industry leaders Schlumberger (SLB) and Halliburton (HAL) together account for almost a third of OIH’s holdings.
Indeed, just the top five holdings, including Baker Hughes (BHI), National Oilwell Varco (NOV), and Cameron International (CAM), together with SLB and HAL, account for about half of OIH’s portfolio. This makes OIH not only a very industry-specific security but also highly reliant on a handful of big companies’ fortunes.
In the week ending August 14, OIH’s biggest gainers were Silica Holdings (SLCA), which gained 9%, and Halliburton (HAL), which gained 5.6%. Baker Hughes (BHI) gained 2.88% in the same period. These three companies constitute 23% of OIH.
As we saw in Part 2 of this series, these gains are far less than the gains in some of XOP’s top holdings. This should help explain XOP’s superior performance.
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