Jim Donnelly, Olson Global Markets
Although overbought conditions persist on long-term charts, the Philadelphia Oil Service Sector Index (OSX) continues to climb in a steady, plodding fashion. A modestly improving domestic economy combined with a series of better-than-expected economic data from both Europe and China are also supportive to the oil service sector by themselves. Still, plentiful supplies of crude oil combined with modest demand could mitigate any thoughts of a sharply rising energy prices under normal circumstances.
A growing unease over the prospect of a military strike against Syria combined with the uncertainty associated over the myriad of “what if” consequences that could occur in the aftermath of such a strike, however, make this situation a lot less than normal and could have a direct impact on the oil service sector.
History shows that the direction of oil prices and the demand for oil service sector equities have risen prior to past confrontations in the Middle East. It has also been typical that once the missiles begin to fly, the price of oil and oil sector stocks decline as well.
Some will say that this time is different. With a no boots-on-the-ground approach to the Syrian conflict combined with a preordained limited scope, many observers, analysts and traders could remain mired in uncertainty even after a strike begins due to a global reluctance to get involved and with ubiquitous worries that an expansion of regional unrest could result.
Technically, the OSX is in an overbought condition but will not find major resistance until testing key trend line resistance at the 287.50 level, which represents a 7.5% gain from the end of trading last week. Further, an unexpected break above 287.50 would likely create addition drag on consumer spending and the economy as the cost of transportation and the cost of heating homes rise.
It may be needless to say that as this week begins there appear to be too many questions accompanied by too few answers to temper this growing unease.