Oilfield service companies are fighting an uphill battle after years of weak demand from traditional energy producers. A relentless multi-year decline in U.S. rig counts has resulted in beaten-down oilfield service companies turning to an unlikely new customer base: technology firms racing to power AI data centers.

According to the WSJ, companies such as Solaris Energy, Liberty Energy, and ProPetro are pivoting to supply modular natural-gas turbines directly to data centers. Their experience generating power to fuel fracking operations makes them well-suited for the role. This unique opportunity lies in the speed with which oilfield service companies can bring data centers online. Per the WSJ:

This equipment doesn’t face the yearslong wait list that some large-scale natural-gas turbines do, such as ones from GE Vernova. Some utility-scale gas turbines have five- to seven-year wait lists, according to Paul Sotkiewicz, president of E-Cubed Policy Associates. Developers of utility-scale natural-gas power plants are also dealing with a construction-crew shortage. Modular equipment by contrast is far less complicated to install and doesn’t face the same constraints.

However, investors should be cautious about assuming this new demand will last. Data centers may only treat oilfield servicers as a stopgap while waiting for utility-scale capacity or cleaner energy sources. If so, the current boom could fade as quickly as it arrived.

But their modular nature means these systems probably aren’t the cheapest option over the long run. They have an upfront cost advantage over, say, utility-scale, combined-cycle gas power plants requiring extensive construction work. But they involve more variable costs: Higher fuel costs, for example, because of lower equipment efficiency. Their equipment also tends to have more frequent replacement schedules, which can come with the risk of escalating costs.

For now, oilfield service companies may have found a lifeline in AI’s insatiable power demand. Whether it becomes a sustainable business model remains to be seen.
 

What To Watch Today

Earnings

• No earnings reports today

Economy

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Market Trading Update

Yesterday, we noted that the bullish market trend continues despite the ongoing bearish momentum and relative strength divergence. Furthermore, all asset classes perform exceptionally well regardless of their risk profile. Yesterday morning on the RealInvestmentShow, I discussed that the new portfolios launched on SimpleVisor on August 1st of this year show this rally, particularly with all the various models performing exceptionally well regardless of their risk profile (conservative to aggressive). Historically speaking, this should not be the case, but it just shows that money is chasing literally “everything” in the market.

Furthermore, the sector rotation in the market continues to be very fast. On Wednesday, the “Magnificent 7” stocks and Oracle (ORCL) drove the market, but yesterday, it was everything else on the weaker-than-expected inflation data. In particular, bonds rallied sharply again, breaking the 4% barrier on the 10-year Treasury as the massive short position against treasuries came under pressure.

As we noted early this week, bonds are getting very overbought here, and traders should look to book some short-term gains. From a purely technical basis, the bond proxy (TLT) is trading 3-standard deviations above its 50-DMA and is approaching more overbought conditions on both a relative strength and momentum basis. It is crucial to note that markets can remain overbought for much longer than you can imagine, so I would not liquidate the entire position. Furthermore, bonds are just breaking out of a very long consolidation and basing period, which gives bonds more upside from here.

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From a fundamental basis, the decline in inflation and weakening economic data continues to suggest lower bond prices in the future. Still, as is always the case, nothing moves in a straight line. Such is why taking some profits if you have been trading the position makes sense, and look to add back to your holdings at 4.2% on the 10-year when we get there.
 

CPI and Jobless Claims Keep Fed on Track

August’s CPI showed inflation still lingering, but not enough to knock the Fed off course. Core CPI rose 0.3%, in line with expectations, while headline CPI rose 0.4%, its largest increase this year. The table below breaks out inflation by its broader categories and weighting.

Looking under the hood, core goods inflation accelerated to its highest level this year. This could signal that tariffs are beginning to impact goods prices; however, they are unlikely to create sustained inflationary pressures. Meanwhile, services inflation remained sticky in August, reaffirming the Fed’s cautious approach to the pace of rate cuts.

Markets, however, chose to look past the CPI release and focused on yesterday’s weekly jobless claims instead. Jobless claims jumped to 263k, the highest since October 2021 and well above expectations of 235k. While weekly data can be noisy, a sustained increase would add to growing evidence that the labor market is softening. Equities closed higher, and bond yields fell as investors look forward to a rate cut next week.
 

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Momentum Strategies And Physics

In his 1687 book, Philosophiae Naturalis Principia Mathematica, Sir Isaac Newton defined momentum as the product of mass and velocity, or p = m * v. The reason we begin with a physics lesson is that momentum strategies are very popular, and Isaac Newton’s famous formula can teach us a lot about financial asset momentum.

Recently, we have seen rapid shifts in and out of various sectors and stock factors that disrupt momentum strategies. Therefore, understanding how momentum strategies work can help you better identify when they might be effective and when it’s time to switch to a different approach.

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