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Oil Up On OPEC

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Shares of Oil Service (OSX.X) companies were higher again this morning after their rebound late last week. The OSX.X was higher by 2.40 percent in early trade, one of the day's best performing sectors. Elsewhere in energy, the Oil Index (OIX.X), a measure of the larger integrated oil companies, was fractionally higher by about 0.20 percent. While the Natural Gas Index (XNG.X) was also better by a similar fractional amount. Clearly the OSX.X and its member components were the beneficiaries of the recent rhetoric out of OPEC.

The cartel of Oil Producing and Exporting Countries announced late last week that it would leave its output quota unchanged and simultaneously planned a June meeting to reassess market conditions at that time to determine whether production would be altered. The current quota, which has been in place since the beginning of the year, calls for just under 22 million barrels per day.

What analysts are surprised by is OPEC's commitment to maintaining its quota. Recent reports have suggested that the compliance among member countries is on the rise and that trend is growing. OPEC reaffirmed last Friday that its goal was to stabilize the price in the oil market.

However, just how long OPEC members adhere to the quota remains to be seen. Nevertheless, the energy market seems to like the recent talk from the oil cartel. The crude oil (CL02M) market has been gaining strength and is just below its pre 09/11 levels at $25 per barrel.

The chart below has a retracement bracket from the high in oil last September to the subsequent low traced in November. The retracement level at $25 combined with the psychological significance of that level has kept a lid on the price during the recent rally. Obviously a breakout would have the price of oil poised to test the upper end of the bracket, or its highs from last September.

Crude Oil (Daily)

With its rally today, the OSX.X once again moved much further above its September levels in contrast to the price of oil. The equities often lead the commodity and such has been the case recently in the OSX.X and price of crude.

There's broad strength today in the OSX.X rally, which has been the case in recent days in which the group moved higher in tandem. The usual leaders are once again displaying strength today, including BJ Services (NYSE:BJS), Nabors (NYSE:NBR), and Rowan Cos. (NYSE:RDC).

OSX Components

The biggest concerns that I have about the OSX.X and, indeed, the broader energy space is twofold. First, the group needs strength in the economy to continue moving higher. It's my opinion that the OSX.X has already discounted quite a recovery in economic activity. Second, too swift of a rise in the price of energy could put a crimp into the economic recovery, for both businesses and consumers.

Eric Utley
Option Investor

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