Consider Drillers While They're Down

We all know what has happened to oil prices. Fears of global shortages that drove prices up to near the $150-a-barrel level have subsided, and oil prices have since fallen by about a third. The oil-service stocks that had such a dramatic price run-up have declined right along with the base cost of energy.

Since July of this year, the Oil Services HOLDRs(OIH Quote - Cramer on OIH - Stock Picks) has fallen in price from over $220 down to about the $160 level. I am a bottoms-up investor and don't usually take notice of a particular industry until it becomes extremely overvalued or undervalued. Right now, when I run screens for low-valuation stocks, many of the oil services and drilling companies are popping up. I believe this represents an opportunity for traders and investors alike.

Although worldwide demand has slowed in recent months, I believe this decline is temporary. The current global economic situation may dampen demand in the short run, but eventually it will recover and continue to grow. In spite of all the election-year posturing about developing new energy sources, the truth is that petroleum will remain the world's major fuel source. Emerging markets will continue to grow, and their demand will increase in the long run.

Already we see signs that these nations are taking steps to recover. China is lowering interest rates and taking other steps to strengthen its economy and reignite growth. The supply side of the equation is far from certain as well. OPEC can, at any time, cut production to stabilize or increase world prices of oil. Earlier this month, we saw the organization decide to hold firm on production quotas, cutting back 500,000 barrels a day. In the long run, oil goes higher, and that is good for oil-service stocks. Weakness in the U.S. dollar as a result of the credit crisis can lead to higher prices as well.

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