By Alex Kimani
Oil futures are not exactly immune to a commodity rout. Oil prices have been pulling back over the past few days, with July WTI crude (CL1:COM) down 2.3% to $70.44/bbl after closing last Wednesday at the highest level since October 2018 while August Brent crude (CO1:COM) has slipped by a similar margin to $72.67/bbl from the highest close in more than two-and-a-half years thanks to the Federal Reserve’s hawkish shift in tone. On Wednesday, Fed Chairman Jerome Powell said during his post-decision press conference that rising inflation is due to mostly “transitory” factors, but also admitted that inflation may be more persistent than they currently expect. “If we see inflation moving materially above what we see as consistent to our goals and persistently so, the Fed would act to bring it down.”
The markets did not like the Fed’s doublespeak, with commodities and stocks falling while the dollar rose. Steep losses in the S&P energy sector (XLE) reflect oil’s drop. Yet, the group remains the year’s best-performing sector, with today’s losses trimming its YTD gain to just below 40%.
The bright side of things: The latest selloff is likely to end up being a mere speed bump in the oil price rally, with a cross-section of analysts predicting $100 oil.
Even the usually ultra-conservative IEA has lately turned bullish, urging OPEC+ to open the taps.
An even brighter spot: The previously downtrodden oilfield services sector is showing very promising signs that business is close to returning back to normal.
Oilfield services companies such Schlumberger (5.85%), Halliburton (6.18%), Baker Hughes (5.16%), and National Oilwell Varco (4.29%) are now reporting that prices for their services and equipment have bottomed out, and many are now recruiting new workers.
It’s a clear sign that U.S. crude production is ticking back up after a very depressing period. Indeed, for the first time since the pandemic hit, U.S. shale output is expected to rise by 38,000 barrels per day in August despite generally flat spending by oil and gas producers.
The OFS sector’s biggest representative, the VanEck Vectors Oil Services ETF (5.59%), is up 45% in the year-to-date, marginally better than the 40% gain by the Energy Select Sector SPDR Fund (3.21%).
While the Fed sees GDP growth moderating to 3%-3.5% next year from about 7% this year, that is still very strong growth when you consider that the U.S. didn’t have a single year with 3% growth between the 2008 financial crisis and the pandemic.
The shift is most evident in the employment market, with OFS firms such as Schlumberger and Halliburton hiring once again.
OFS companies are reporting that drilling and well completions activity, as well as pricing, are edging higher, while roughnecks are also saying they are seeing an increase in job offers. Oilfield workers were some of the hardest-hit demographic by the Covid-19 pandemic in 2020. Nationally, the oil and gas industry is estimated to have lost 107,000 jobs as per global consulting firm Deloitte, with an estimated 200,000 roughnecks losing their jobs at the height of the global lockdowns.
According to trade group Energy Workforce & Technology Council (Council), U.S. oilfield jobs increased in May by 1.6%, or about 9,700 positions, with Some 27,000 oilfield jobs having been regained since February.
Prices are expected to soon follow suit.
Pricing power is returning in niches like high-spec onshore drilling rigs, with day rates for such U.S. rigs already having seen a $1,000 per day increase with more to come. Ensign Energy Services, a global leader in drilling and servicing wells, has forecast a $2,000 to $3,000 per day increase in rig day rates in Canada into the autumn as supply and demand tighten and has predicted that the second quarter is going to be the bottom for cash margins in the United States.
Top OFS picks: Schlumberger and Baker Hughes.
Now that Exxon Mobil‘s (3.63%) board includes three members that have pledged to push for environmental, social, and corporate governance criteria, Morgan Stanley says the company is well-positioned to exceed investor expectations in becoming one of the leaders in the clean energy transition.
MS rates Exxon shares at Overweight with a $71 price target and believes the new board members could prompt Exxon to limit oil and gas capex in favor of more low-carbon technologies, which the company can implement at scale, “helping mitigate energy transition uncertainty while also offering new attractive growth options for the company.”
In the same ESG theme, MS has picked Schlumberger and Baker Hughes as leaders in oilfield services and drilling and sees Royal Dutch Shell (3.58%) and Eni S.p.A (2.98%). as top picks among European producers.