OIH has been an excellent, although not perfectly correlated, proxy for crude oil since 2003. Even earlier than that, in July 2002, the stock traded at just over $46. It's closing high on May 10th of this year was just over $167. That's a gross gain of over 265%. Of course that means you would have bought at the low and sold at the high, and nobody ever does that. But that's not my point. My point is that while you can cherry pick the best stocks in the oil service sector (HAL for instance, which is way off its highs and, IMO, a good buy right now) OIH is the easiest way to be bullish oil services through the stock market. It's down nearly 25%, along with crude, from the early May highs. If crude collapses further (and it's already been an impressive crash/correction) then of course OIH will track it. That's your risk. But a couple of other points. First, the most direct ETF vehicle for being long oil is USO, the ETF that tracks the crude price. Though USO is relatively young, my suspicion is that it's going to be more volatile than OIH because the crude oil price is going to be more volatile than the earnings announcements coming from the consituent companies that make up OIH. For the buy and hold investors who simply wants to be long oil through an ETF, OIH should be easier to sleep with at night. Second, though the price of crude, and USO by extension, will vary with the seasonal and inventory data that traders sometimes look to for short-term direction, the long-term picture for oil is bullish, IMO. My two cents is that global oil production peaked at around 85mbpd in December of last year, as Princeton Professor Kenneth Deffeyes pointed out at the time. We are in a plateau of peak production of undetermined length. In layman's terms, that means the world's giant producing oil fields will keep cranking out just enough, along with new production that comes on line to sustain current levels of production, which by the way are only just exceeding levels of demand, making it, among other things, very difficult to fill strategic stockpiles in places like China and the US. No one is sitting on swollen inventories, even though lower prices have made it easier to purchase stockpiles on the open market. So the lower oil price is really a recovery period in crude oil prices, driven by a false sense of security about the underlying dynamics of global supply and demand. Demand is rising. Supply and productive capacity are not. With most other commodities the cure for high prices would be high prices. And it's true that at some point high oil prices will destroy demand. Oil will simply be too expensive for some countries to purchase on the open market with hard currency reserves. It wouldn't be the first time that an oil shock exhausted currency reserves in the developing world. I should add a third and final point that the price of oil, like all commodities, is linked to the fortunes of the U.S. dollar, which has lately been enjoying a bullish run of its own. In fact, with yesterday's close at 87, the USD index is at almost exactly the same level it was in mid-July. Should it break out, the dollar could enjoy a nice fear-induced flight-to-safety rally up to the U.S. elections in early November. But in the event, while this could drive OIH a bit lower than current levels, I think the dollar's curret rally has exhausted most of its momentum. With the Fed revealing that its concerned about inflation, not only will bonds sell off, but the dollar index should turn down and the dollar itself weaken against a variety of currencies. Most importantly, a weaker dollar means rising oil prices. And so you have a host of factors which suggest it's a good time to buy OIH. But the biggest long-term factors are the fundamentals of global oil production, which favor the service companies over the major producers, and global inflation in US dollar terms. It would also be a great time to ad energy exploration companies, but they are typically a lot smaller, less liquid, and much riskier. Not that OIH is without risk. Like with all stocks, you could lose your money. But at this particular time, it's still not too late to invest in the energy bull market.
$122.8 (10/12/06)
