Circling Back to Baker Hughes

 | Jan 09, 2014 | 2:35 PM EST  | Comments
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I sometimes regret being an energy-focused trader because, frankly, nothing much has been happening to make an energy trader happy: crude prices have been range bound, stocks have had limited runs and the names that have run look tired at their highs.

But I don't believe things will stay this way for long. One of the plusses of being an energy-focused trader is that you can depend on volatility returning; you just have to wait around a little. This is one of those waiting periods.

So, we're forced to move away from the big-themed ideas that have kept us interested through much of 2013. Domestic exploration-and-production companies will languish as fourth-quarter reports are being prepared, and production numbers will likely go through the roof again. I'll talk more about that as the numbers are revealed, but there's a reason West Texas Intermediate prices have declined 7% in the 10 days or so with no apparent catalyst.

Refining has been another big-themed idea of mine through 2013 and into the new year, but with increasing talks of the crude-oil-export ban ending, those shares are going to rise -- but dangerously so, dancing on a knife's edge on unpredictable government action.

So what's left? From a trading perspective, there's one sector where we need to do dig deep (pun intended) just to get some perspective. Oil services prove that we don't have many opportunities right now as we wait for a stronger spot to reinvest in our favorite zones.

As shale in the U.S. continues to overheat, and with limited opportunities for oil-services companies, there has to be a rebound in the more fundamental and known production areas around the world. Not everything is a U.S.-centric trade, and the large multinational oil-services companies that didn't expand much in 2013 will benefit from expansion, particularly as U.S. shale plays reach their limitations on efficiencies. That limit comes more quickly as the maniacal craze for shale production heats up.

Again, I'll revisit this theme in the future, but, for now, let's look at the chart of a stalwart of the drilling services group to prove my point: Baker Hughes (BHI).

Source: TradeStation

This is one of my favorite oil-services companies and a great trading vehicle. I often refer to BHI's chart to get another view of the trajectory of energy markets. The view isn't immediately encouraging, though. After a very strong third-quarter report, Baker-Hughes seemed off to the races, but the limited and limiting forces of U.S. shale drilling, combined with falling rig counts, has cratered the stock in recent weeks.

Despite "filling of the gap" on the chart (caused by the third-quarter report), I'm not ready to say that the downturn in BHI, or any of the large services companies, is over. We're in a vortex created by upcoming shale-oil-production numbers that, again, will be huge and will continue to pressure crude prices domestically. Until the fog clears, I'm not ready to do anything big or long term.

My recommendation for this week remains to trade small and raise cash.

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