The WTI crude oil contract has run in place in recent months, glued to the 50 level despite growing geopolitical risk and President Trump’s insistence that deregulation will trigger a profit renaissance in the oil and gas fields. Neither catalyst has helped the oil services sector, which continues to slump near 6-month lows, threatening to break support and head into a major rout.
Schlumberger, Ltd. (SLB) earnings on Friday morning are unlikely to staunch the bleeding, with the $107-billion company reporting inline EPS at $.25/share while missing quarterly revenues by nearly 10%. The limp results triggered a 3.5% decline at the start of the U.S. session and could attract even greater selling pressure in coming weeks.
Vaneck Vector Oil Services ETF (OIH) tested the 2011 high in the mid-50s in 2014 and rolled over in a decline that continued into the 2016 low at $20.46 when the fund bounced at the 2008 bear market low. Bulls proclaimed victory, generating months of higher prices, but the long-term charts tell us the secular downtrend may still be intact. For starters, the recovery wave stalled in December at the .386 Fibonacci selloff retracement and 200-week EMA, giving way to a steady downtick that’s persisted into the second quarter of 2017.
The fund broke a yearlong rising trendline (blue line) in March when it sold off through support between $30 and $31 and has failed to remount that technical barrier in the last six weeks. It posted a 5-month low earlier this week, with this morning’s sector earnings unlikely to provide the positive catalyst needed for a sizeable recovery effort. It’s now given up nearly half of the 2016 advance.
The weekly Stochastics oscillator bounced off the oversold level in March but has failed to capitalize on the cyclical tailwind, reversing at 50-week EMA resistance and continuing to post weekly lows into April. This price action signals a bearish divergence because the crossover predicts higher prices and that hasn’t happened, at least so far. More ominously, On Balance Volume (OBV) has plunged to a multiyear low, telling us that funds and institutions are abandoning positions at a rapid pace.
Schlumberger holds the highest capitalization in the sector, comprising more than 20% of the fund’s weighting. It topped out at $115 in 2007 and tested that level in 2014, with sellers taking control in a vicious downtrend that cut the stock price in half into the January 2016 low at $59.60. A rally through mid-year stalled at the .386 Fibonacci retracement and 200-week EMA while a breakout into January 2017 topped out near $88.
The stock failed the breakout just two weeks later, entering a decline that just hit an 11-month low. That selloff also broke support at the 200-day EMA in March, with technicals in several time frames predicting even lower prices in coming months. Even so, oversold relative strength readings raise odds for a final recovery wave that tests new resistance now centered around $80.
OBV failed to recover after the 2014 into 2016 downtrend, hovering mid-range through the middle of 2016 and then resuming its southern trajectory in a fresh distribution wave that’s still in progress. The indicator is currently testing the early 2016 low, with a breakdown likely to coincide with a trend advance that exposes a painful trip into the upper 50s, where deep support may generate a longer lasting bottom.
The Bottom Line
Schlumberger and the oil services sector are lagging the broad market and energy complex, losing ground in a decline that raises significant doubts about the president’s sweeping energy initiatives. Investors and market timers haven’t been moved by the Oval Office happy talk, selling the sector aggressively for the last seven months.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>