April 1, 2013 - Oil Service Providers Offer a Great Energy Play
A few short years ago, the oil sector was on fire. Oil was moving steadily higher, finally hitting an all time high during the summer of 2008, when it spiked all the way up to $147 a barrel.
Since that time, oil has been far less volatile. Since the start of 2013, oil prices have been stuck in the $90's, currently trading at $95.79. With oil prices being less volatile, it has become much more difficult for investors to find easy profits in oil companies.
Now that we are headed into the heavy demand summer driving months, attention is once again shifting to the energy sector. Investors know that oil often makes a run higher during the summer months, and now is the time to get in, before the run begins.
When considering putting some money to work in the energy sector, a lot of investors instantly think about the big names such as ExxonMobil (XOM) and Chevron (CVX), but perhaps a better path to take would be investing in one of the many exchange traded funds for the energy sector.
Two of the biggest oil ETFs are the iPath S&P GSCI Crude Oil TR Index ETN (OIL) and the Market Vectors Oil Services ETF (OIH). The main difference between the two ETFs is that OIL is set up to track the actual price of oil, while OIH is set up to track companies in the oil services industry.
Comparing the two charts, we see that over the past twelve months OIH has been a much stronger performer. One thing to really pay attention to is that while OIL and OIH follow a similar trading pattern, when both ETFs hit selling pressure, OIH sells off less and recovers more quickly, in addition to which, when both move higher, OIH enjoys a stronger rally.
As the global economy continues its recovery, demand for oil will remain strong, with big oil companies looking hard for more oil reserves around the world. Consequently, demand remains high for oil services, and this is the main reason why OIH has been a better former than OIL.
Because we envision demand for oil services remaining strong through the remainder of the year, we will look at setting up a trade to take advantage of this opinion, while at the same time giving us a little cushion, just in case the market turns against us.
Consider the July 35/38 bull-put spread for a credit of 30 cents. In this trade, you would sell the July 38 put while buying the same number of July 35 puts for a credit of 30 cents. This trade has a target return of 11%, which is 36% on an annualized basis (for comparison purposes only), and the trade has 10% downside protection.
Chart courtesy of stockcharts.com