By Justin Spittler, editor, Casey Daily Dispatch
It was the stock’s best day in five months.
Transocean, one of the world’s largest oil services companies, soared 8% on Monday.
Noble Corporation, another major oil services company, spiked 8%, too. Rowan Companies jumped 5%. Diamond Offshore Drilling and Ensco both ended the day 9% higher.
These are huge one-day gains. But these stocks are likely headed even higher.
I’ll explain why in a minute. And I’ll tell you how to profit from this.
But you should first understand something about oil services stocks.
• They don’t pump oil…
Instead, they sell machinery and equipment to companies that do. They also provide services like seismic testing and rig transportation.
This makes them very sensitive to the price of oil.
Think about it. If the price of oil is low, oil producers make less money. This leads them to drill fewer holes…pump less oil…and buy less equipment and machinery.
That hurts oil services companies.
The opposite happens when the price of oil is high.
Oil producers make more money. They drill and pump more. And they spend more money on machinery and equipment.
• I’m telling you this because the price of oil has jumped 23% since June…
You can see this huge move below.
Oil is now trading at a four-month high. And it’s officially in a bull market.
But that’s not the only reason oil services stocks took off on Monday.
• UBS just upgraded several major oil services companies…
UBS is one of the largest banks on the planet.
On Monday, it raised its price target for oil services stocks Transocean (RIG), Rowan Companies (RDC), Ensco (ESV), Noble (NE), and Diamond Offshore Drilling (DO) – the five oil services companies I mentioned earlier. And it lifted its earnings forecast for these companies by about 25%.
According to CNBC, it did this due to “signs of improving demand for oil rigs and stabilization in the sector.”
Now, we don’t normally put much stock in what banks like UBS say. But the Swiss banking giant is absolutely correct.
• The stage is set for a huge rally in oil services stocks…
The evidence is everywhere…
Demand for oil is picking up. Earlier this month, the International Energy Association (IEA) raised its global oil demand by 100,000 barrels per day (bpd). It did this due to “stronger than expected” demand in the U.S. and Europe.
It was the third straight month that it raised its estimate.
Global oil inventories are declining. According to the IEA, global oil stocks are returning to normal levels after being extremely bloated for months. It even recently said that the oil inventories of the Organization for Economic Cooperation and Development (OECD) could fall below their five-year average “very soon.”
Global oil production is coming down. The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 12 major oil-producing countries, has cut its production by 1.8 million bpd since the start of the year. Last month was also the first time in four months that global production fell.
These are ingredients for higher oil prices…
• Investors have taken notice…
Just look at the chart below.
It shows the performance of the VanEck Vectors Oil Services ETF (OIH), which invests in 26 large oil services companies.
You can see that OIH has surged 18% since last month. More importantly, OIH has broken out of a downtrend that it’s been in since January.
• This is bullish for oil services stocks…
You see, stocks that break out of downtrends tend to keep rising…and oil services stocks have plenty of room to run.
After all, oil is still one of the world’s most hated commodities. It’s down more than 50% since 2014. Not even uranium is that beaten down.
Oil services stocks have plunged even more.
OIH, for example, is down 56% over the last three years, while some individual oil services stocks are down more than 80%. These stocks would need to soar 400% just to reach their 2014 highs.
In short, oil services stocks could be in the early innings of a monster rally.
So, consider picking up shares of oil services companies if you haven’t already. You could buy OIH or a similar ETF. This would allow you to spread your bets across the industry.
Just understand that these stocks are volatile. So, treat them like a speculation.
Las Vegas, Nevada
September 27, 2017
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