Oil service stocks prepared for surge

The hot topic in Washington is about lifting the ban on off-shore drilling. But there is also talk of opening up areas on land that could increase domestic oil production.

And thus, for the first time in decades, the oil service industry may actually have the opportunity for domestic growth in the U.S. where there is nearly zero political risk compared to Venezuela, Nigeria, Libya, Saudi Arabia, and just about everywhere else in the world.

Here are two other thoughts to consider. One is that stocks in this sector tend to move as one. So if you buy one or two individual stocks, and there is nothing lurking on the news front for either one of them, your chance of catching the trend with either one is pretty good. The other is that they're just getting to that 20 P/E ratio, which is where some value players get off the train but where the momentum crowd starts to get excited.

So here's a scenario to ponder. Even if oil prices fall as low as $100 per barrel, the clamor for more domestic production isn't likely to calm down. In other words, $100 oil is still enough to keep up the pressure on politicians to let go of the ban on more domestic drilling. And that means that the opportunity for growth in oil service is likely to remain intact for years.

When you add the fact that non-OPEC sources of oil – ie., Mexico, the North Sea, Alaska, and other areas – are starting to show signs of slowing, and that gasoline is now above $4 for regular just about everywhere, the pressure is starting to build. Thus, it seems nearly inevitable that something is about to give in Washington.

And for the oil service industry that's the equivalent of "money for nothing and the chicks for free." Which is why a break above the 218-220 area for OIH may well be the sign that yet another upleg in the oil service sector may be near.

ABOUT THE AUTHOR

Dr. Joe Duarte

Dr. Joe Duarte (www.joe-duarte.com) analyzes the markets on a daily basis and is widely quoted (CNBC, Marketwatch, Financial Wire, CNN.com and others). He is author of several books on the markets and sector investing. His latest “Trading Futures For Dummies” is now in stores online and in your neighborhood.

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