Shares of oil services company Schlumberger (SLB -1.19%) soared 17.8% in May, according to data provided by S&P Global Market Intelligence. The move comes as part of a broader appreciation in the oil services sector, with peers Halliburton and Baker Hughes also rising by a mid-teens percentage in the month.
In fact, it's been a very strong year so far for the sector, with investors warming to the gradual rise in the price of oil and how that induces oil majors to start spending on exploration and production (E&P).
In a nutshell, the case for oil services stocks, as laid out by Schlumberger CEO Olivier Le Peuch, is that a combination of demand recovery and tightness in supply (caused by years of underinvestment by oil E&P companies) will lead to a multiyear cycle of capital spending by oil companies -- great news for Schlumberger.
Le Peuch has a point. After all, as you can see below, the oil majors made savage cuts to their capital spending in response to the oil price slump in 2014. However, another bullish argument for oil services companies can also be seen in the chart. Note how there's a lag in the cut in spending after the price dropped in 2014. This is due to the long-cycle nature of a lot of oil projects -- they are not projects that can be easily halted in mid-development. If this is repeated with the recovery in the oil price, then the current capital spending cycle in the industry could have legs.
Moreover, at a recent investor conference, Le Peuch noted that spare capacity was at "decade lows as a result of past underinvestment," and the ongoing disruption of supplies from Russia is creating the need for more investment.
Turning to the demand side, bullish investors received a boost with the news that China is easing coronavirus-related restrictions in Shanghai -- the country's main economic center. The lockdowns in Shanghai have exacerbated the ongoing supply chain problems in the global economy and created fears that this could derail the global economy and demand for oil.
The near-term outlook is excellent for the oil services industry. If capital spending is disciplined and demand remains robust, then oil prices could remain elevated for an extended period. That's likely to lead to a period of multiyear growth for Schlumberger.