What happened
Oil stock investors were having a terrific run in late February and early March -- with eight straight trading days of consistently higher stock prices for shares of oil giants ExxonMobil (XOM 0.15%) and Chevron Corporation (CVX +0.33%) -- but their run came to a screeching halt on Wednesday. As of 2:30 p.m. ET, shares of Chevron are down 3.5% and Exxon stock is off 6.2%. Underwater pipeline inspection and oil drill repair company Oceaneering International (OII +0.20%) is having an even worse time -- down 9.2%
And the United Arab Emirates (UAE) is the reason for all of it.
Image source: Getty Images.
So what
As CNN just reported, the government of the UAE -- a member of the Organization of the Petroleum Exporting Countries (OPEC) -- says it will encourage OPEC to ramp up oil production in order to offset supply constraints created when the U.S. and allied nations announced a boycott of Russian oil earlier this week.
No sooner had this been announced than oil prices began dropping. As of 2:30, West Texas International crude prices are already down nearly 13% at just under $108 a barrel. Pricier Brent crude is falling even farther, down nearly 14% at barely $110 a barrel.
So what high oil prices gaveth to the oil majors, lower oil prices are taketh-ing away. This, in a nutshell, is why the share prices of oil stocks are sliding today.
Now what
And yet, you may have noticed that neither Exxon stock nor Chevron (nor Oceaneering International) is down 13%, or 14% either. The real question here, it seems to me, is why oil stocks aren't selling off even harder given the scale of the sell-off in oil prices.
The answer, of course, is that although the UAE is encouraging OPEC to open its oil spigots, OPEC hasn't yet said it will do so. To the contrary, just last week a meeting between OPEC and its partners (one of which is Russia) decided to not increase oil production any faster than at the gradual pace they had already agreed to.
Of course, that was before the embargo on Russian oil. That was before oil prices briefly topped $130 a barrel. You see, while oil producers logically love the idea of getting more money for the oil they sell, they still must maintain a kind of balancing act -- if prices go too high, they risk incentivizing their customers to wean themselves off of oil altogether by developing clean energy sources such as wind, solar, and nuclear power. Once that happens, it will be difficult to get them to ever come back to oil, and the customers will be gone for good.
With that risk in mind, it makes sense that the UAE might believe now is a good time to begin increasing oil production, before prices get too high. It makes sense that the rest of OPEC (if not necessarily Russia and OPEC+) might agree, even if that means oil prices will begin to subside. And if that's the case, there's still plenty of chance that oil prices -- down today -- will fall even further tomorrow.
