The 2016 election of a free-wheeling Republican businessman should have signaled great times for the U.S. oil patch, but that hasn't happened, even though crude oil hit a four-year high in September 2018. Instead, many energy stocks have dumped to multi-year lows, punishing bewildered shareholders while forcing bullish analysts to play catch-up. And it's likely to get worse in coming months, with rising odds for a worldwide glut at the same time the economic expansion hits the brakes.
The oil equipment and services sector is leading the downside during the current malaise, with the VanEck Vectors Oil Services ETF (OIH) now trading at a 15-year low. That's a breathtaking metric, below the apocalyptic lows posted in 2008 and 2016, highlighting the severity of bearish forces moving the energy sector. It also warns that we can't rule out a stomach-wrenching period that rivals the brutal commodity decline between 2014 and 2016.
Blue chips are currently underperforming smaller companies in the oil equipment and services sub-sector, with Halliburton Company (HAL) trading at a 30-month low while Schlumberger Limited (SLB) probes an astounding nine-year low. Sadly, boom-bust cycles in this small group can often be measured in decades rather than years, telling beaten-down shareholders that it isn't too late to capitulate and take their losses.
The VanEck Vectors Oil Services ETF debuted in the upper $20s in February 2001 and sunk to an all-time low at $13.93 just seven months later. It tested that level in 2002 and turned higher, entering a strong uptrend that hit an all-time high at $76.25 in July 2008. The fund dropped to $20.33 during the economic collapse and bounced into 2011, notching a lower high in the mid-$50s. A 2014 breakout attempt then failed, completing a double top that broke to the downside in August 2015.
The subsequent slide held just above the 2008 low in 2016, yielding a bounce that stalled at the downtrend's midpoint in December 2016. It has been all downhill since that time, with selling pressure increasing after downticks pierced the 2016 and 2017 lows. The decline just undercut the 2008 low, giving up the last tranche of subpar 10-year returns. Ominously, the lows posted right after the 2001 offering now mark the last unchallenged support level, predicting a trip into the lower teens.
The broad-based SPDR Select Sector Energy ETF (XLE) should be watched closely in the coming months, given mass destruction in the oil services sector. This highly liquid instrument came to life in the low $20s in 1998 and ended its first uptrend in the low $30s in 2000. The subsequent decline posted an all-time low at $19.38 in 2002, ahead of a powerful trend advance that stalled in the lower $90s in 2008. The bear market low in the upper $30s a few months later set the stage for a steady uptick that mounted the 2008 high in 2014.
However, that buying impulse reversed quickly, trapping breakout buyers and the momentum crowd in a 50% haircut into early 2016. The subsequent bounce stalled at the 50% sell-off retracement level in December 2016, while three 2018 breakout attempts have failed badly. Range support at $61 now marks the key inflection point in this price structure, with a breakdown opening the door to a sell-off that tests the 2016 low.
The Bottom Line
The oil services fund has broken the 2009 bear market low and could reach 2001's all-time low in the coming months. This bearish price action sounds a general alarm for the broad energy sector, which could head into a painful repeat of the 2014 into 2016 downtrend.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication. >