The Oil-Service Rally Has Little Basis

Everyone jumping on the oil service stocks after the rally in Schlumberger (SLB - commentary - Cramer's Take) last week, but this rally feels like the great year-end tech rally that was predicated upon "the action" and the short-term move in oil futures.

I don't like "the action" kinds of rallies in stocks like Transocean (RIG - commentary - Cramer's Take) and National-Oilwell Varco (NOV - commentary - Cramer's Take) and the whole Oil Service HOLDRs (OIH - commentary - Cramer's Take). I don't like them unless they are from the "last bad quarter" perspective.

Schlumberger, however is from the first bad quarter. Even intra-quarter things slowed down materially. There was simply a broad slowdown in business driven by marginal drillers going under, a severe slowdown in Russia, a lack of desire from the Mideast to spend and a total retreat in new drilling in the U.S., particularly for natural gas.

And while Weatherford (WFT - commentary - Cramer's Take) reported a decent quarter this morning, you can see how Rowan (RDC - commentary - Cramer's Take) is signaling a cutback in new rigs, thus ushering in bad tidings for National-Oilwell Varco and Transocean. Further, I have to believe, from Schlumberger's call, that the big advanced oil recovery and oil shale plays, and the gas to liquid plays will all be cancelled here. Halliburton (HAL - commentary - Cramer's Take) is also saying some projects are being deferred, which is what the precipitate rig-count decline tells you.

Traders then want to presume that with such a decline in new drilling, we are going to get a pop in oil. I believe that the supply issue is paramount, but I believe that's why oil bottomed in the low $30s. I do not believe it is why oil will now challenge the high $70s. That's because much of the demand for oil did not come from the real economy -- it was never as great as we thought -- but from the leveraged economy, notably hedge funds and pension funds seeking to be overweight in oil as a hedge against the dollar, a strategy with disastrous consequences that are not admitted to on any level.

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