If I were only allowed to buy one industry, it would be the oil industry. I have written quite a few bullish articles over the past few months/year. In addition to that, I am overweight oil & gas exploration and production companies as I discussed in this article. However, traders seem to ignore oil services companies which are at a very interesting point right now. Source: Offshore Inspection Group
Why Equipment Companies Matter
The oil market, is a very complex market consisting of upstream, midstream and downstream companies. For the people who are not familiar with these terms, just have to know that these names refer to the multiple stages of crude oil before it ends up in someones car as gasoline for example. Upstream refers to the companies that pump the oil out of the ground (both onshore and offshore) while midstream refers to pipeline operators and every company that gets oil to a refinery. Speaking of refiners, those are companies that are typical downstream companies who turn oil into a wide range of products used as consumer products and much more.
In an oil bull market, I generally speaking want to be in the very beginning of a supply chain: in this case upstream companies. Those are the most cyclical in a supply chain.
And it does not end there. Exploration and production companies are depending on top tier equipment to lower break-even prices and to apply advanced fracking methods. In other words, there is no drilling without equipment companies which makes these equipment companies extremely dependent on the oil outlook and capital expenditures of drilling companies.
The graph below shows how cyclical these equipment companies are. Equipment companies (VanEck Vectors Oil Services (OIH)) lost almost 70% of their value between 2014 and the first quarter of