Oil Services Sector Stalls as Prices Plunge, Explorers Regroup

NEW YORK (TheStreet) -- The oil services sector could continue its downward spiral as energy prices fall from summer highs and seeming settling of international strife in energy producing regions.

TheStreet's Jill Malandrino has more on why the energy markets and related stocks are moving to the downside:

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United States Oil Fund  (USO) and United States Natural Gas Fund  (UNG)  are down more than 10% over the past few months, potentially weighing on future profits and share prices of companies in Market Vectors Oil Services ETF (OIH) , as is seen in the chart below.

The oil services ETF is most heavily weighted by Schlumberger (SLB) , Halliburton (HAL) , National Oilwell Varco (NOV) , Cameron International (CAM)   and Seadrill (SDRL) .

USO Chart
USO data by YCharts

Share prices of oil service companies correlate strongly to energy prices as profit margins generated by drilling and other service firms rise and fall with the price of oil and natural gas. Lower energy prices call for less urgent exploration and less use of oil service company products.

The decline of geopolitical strife overseas, moderate summer temperatures and the rising U.S. dollar have all been cited as reasons for declining energy prices recently.

Tensions between Russia and Ukraine have calmed from its peak in June, when many believed a violent intervention from Western powers against Russia was a real possibility. Considering Russia is one of the top oil exporters in the world, prices of Brent crude oil spiked on the idea of supply concerns in the region.

As of Wednesday, however, Ukraine said Russian troops had moved a bulk of its soldiers out of Ukrainian territory, giving rise to the hope peace could soon take place, leading the fear premium in energy prices to almost completely diminish.

Similarly, extreme weather this past winter in the U.S. led to a spike higher in natural gas prices as demand increased for heating and other energy needs.

Yet, normalization of temperatures over the summer and increased domestic production could lead natural gas prices lower in the fourth quarter and long term according to analysts with Raymond James & Associates.

"The reality is that U.S. gas producers are finding ways to bring online staggering amounts of natural gas at prices well below $4.50, and while abnormally cold winter weather temporarily could support higher domestic gas prices, counting on a strong blast of arctic air isn't a good investment strategy," wrote analysts J. Marshall Adkins and Edward Rowe in a note to clients.

Lastly, the price rise in the U.S. dollar index is weighing on all commodities. Oil, precious metals and agricultural goods are all priced in U.S. dollars and become relatively less expensive when the dollar increases.

The chart below shows the relationship between PowerShares DB US Dollar Index Bullish (UUP) and PowerShares DB Commodity Index Tracking (DBC) . Since the dollar began trending higher in July, commodities have experienced significant selling pressure.

UUP Chart
UUP data by YCharts

With declining tension in Russia, normalization of weather patterns and a stronger U.S. dollar, energy prices look to have a hard time seeing substantial gains in the near future, which should lead to further selling pressure on stocks in the oil services sector.

At the time of publication, the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates HALLIBURTON CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate HALLIBURTON CO (HAL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, revenue growth, solid stock price performance, impressive record of earnings per share growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows weak operating cash flow."

You can view the full analysis from the report here: HAL Ratings Report

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