RBC Capital
Panic...You Haven't Seen Panic Yet
Oil Service Strategist -- May 13, 2005
Investment Opinion
Daily Rap
Investors pounded the OSX yesterday with the index collapsing 4.5% to 126.46.
The OSX is perilously close to its 200-day moving average of 124.44.
There was nowhere to hide in the energy complex with the XOI and XNG also dropping 3.7% and 3.8%, respectively.
The OSX is now down 12.9% from its March 4th all-time high of 145.26.
Blame it on Wal-Mart
Continued concerns about economic growth were not helped as Wal-Mart missed earnings, guided 2Q05 lower and stated that making the full year would be "difficult."
Market participants remain in a bad mood as all was not bad with the Wal-Mart outlook as the company suggested 2H05 will be driven by higher employment and income gains.
Has anyone proferred that this may be a Wal-Mart specific issue and not an indication of a broad consumer spending slowdown?
Assessment
The bears have awoken from hibernation to place their bets.
Can someone please let the bulls out of their pens, its time for a good old fashion brawl.
Those who believe 2.5%+ GDP growth is the right number please step into the bull ring, they need all the help they can get.
Positioning
Buy 25-33% of what you want with the understanding that there will be little in the way of catalysts near term.
Before you load the boat, let's see how the next 2-months play out.
As the Cycle Turns
Oil and natural gas continued to give ground dropping 3.8% & 2.6%, respectively.
A larger than expected build in natural gas inventories unnerved investors following yesterday's "bearish" crude inventory gains.
Commodity Picture
Crude oil and natural gas are now down 16.6% and 17.1% from early April highs of $58.20 and $7.85, respectively.
As recent data points have turned more neutral regarding demand and inventories, investors will likely focus on today versus forecasts of supply/demand three, six months from now, in our view.
Specifically, focus will be on next week's "number" versus intermediate to longer-term supply/demand scenarios.
This will drive greater volatility in commodity prices in the near-term, thus the oil service group as well.
Charts
Four consecutive lower highs over the past two months paint an unpleasant technical picture for the OSX.
Specifically, since hitting its all-time high of 145.26, the OSX has retreated and then rallied to interim highs of 143.08, 138.80 and most recently 135.35 on May 9th.
A sustained rally through 135 will need a turn in macro sentiment, in our view.
Fundamentals
Oil service fundamentals remain sound with no indication of a slowdown.
We continue to see pricing gains across all subsectors with an upward bias to EPS revisions still intact.
Having said that, as we witnessed throughout 1Q earnings season, macro concerns will outweigh positive fundamentals in the near-term.
EIA Natural Gas Storage: Week Ending May 5, 2005
The EIA reported a storage increase of 54 Bcf versus the Bloomberg average consensus estimate of 45 Bcf.
Total storage now stands at 1,509 Bcf, which is 279 Bcf, or 22.3%, above the five-year average of 1,234 Bcf. |
