The VanEck Vectors Oil Services ETF
The VanEck Vectors Oil Services ETF (OIH) gained 1.2% in the week ending June 5. This ETF tracks an index of the top 25 US-listed OFS (oilfield equipment and services) companies. OIH is a good proxy for playing energy prices because the fortunes of OFS companies tend to be closely linked to those of upstream, or exploration and production, companies.
It then follows that OIH would mirror the performance of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks an index of predominantly upstream E&P (exploration and production) companies. Indeed, although XOP closed almost flat last week—see graph above—the movements of the two funds were very much alike throughout the week. Refer to Part 2 of this series for more about XOP’s performance last week.
As we noted earlier, the United States Oil Fund (USO) and the United States Natural Gas Fund (UNG) tracked weak energy prices lower last week. USO lost 2% and UNG lost ~2.6% in the week ending June 5. These commodity ETFs track changes in prompt futures prices.
OFS companies, as the name suggests, provide equipment and services that help E&P companies extract energy. These can range from resource analysis even before a well is drilled, to the equipment used for drilling and energy transport.
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.
OIH likely drew strength from improving sentiment around the energy sector last week, as we saw with XOP in the previous part.
OIH tracks a capitalization-weighted index. So, like we saw with XLE in Part 1, OIH, too, can be influenced by a handful of large companies. Industry leaders Schlumberger (SLB) and Halliburton (HAL) together account for almost a third of OIH’s holdings. SLB lost 0.7%, while HAL gained 0.7% last week.
Indeed, just the top five holdings—SLB, HAL, Baker Hughes (BHI), National Oilwell Varco (NOV) and Cameron International (CAM)—account for about half of OIH. This makes OIH not only a very industry-specific (OFS) security, but also one that’s very reliant on the fortunes of a few big companies.