In the last month we have witnessed a pronounced divergence between crude oil prices and the oil services sector as represented by the OIH:
OIH (Daily - with WTI crude at top an OIH/WTI rolling 20-day correlation at bottom)
Why the extreme underperformance by oil-service shares in recent weeks even as crude oil remains relatively stable near $50/barrel? At -32% year-to-date OIH is currently competing for the worst performing sector of 2017.
Investors seem to be expecting thinner profit margins and have all but given up hopes of a return to $60+ per barrel crude prices. Moreover, with stalwart oil services names (OIH constituents) such as National Oilwell Varco (NOV) trading below book value (.82x book) it might be time for value investors to begin sniffing around the oil patch.
Despite a nasty downtrend, the risk vs. reward proposition is becoming increasingly compelling.
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