What happened
Oil and gas stocks got hammered again this morning to extend their losses from yesterday. Most stocks from the sector are trading deep in the red around Tuesday noon as the market awaited oil cartel OPEC's monthly oil market report.
Here's how some of the heavyweights were performing as of 12:12 p.m. ET today:
- ExxonMobil (XOM 0.02%): Down 4.9%.
- Chevron (CVX 0.44%): Down 4.3%.
- Occidental Petroleum (OXY -0.09%): Down 2.7%.
- Phillips 66 (PSX -0.66%): Down 3.5%.
- PBF Energy (PBF -0.37%): Down 10.2%.
So what
Oil prices are plunging just as swiftly as they rose in recent weeks, and that's triggered a massive sell-off in oil and gas stocks. As of noon today, both West Texas Intermediate (WTI) crude oil and Brent crude oil prices were down around 8% each, while natural gas was trading 2.8% lower.
Oil prices shot up to their highest levels since 2008 and almost touched $140 per barrel on March 7 as the Russia-Ukraine conflict escalated, and compelled the U.S. and its European allies to consider banning oil imports from Russia.
Image source: Getty Images.
The ban didn't happen, and oil prices started to cool off soon thereafter. It's been a dramatic fall since then: Oil prices have crashed below $100 per barrel as of this writing. As prices continued to plunge, big institutions like hedge funds closed massive amounts of long position in crude last week, according to Bloomberg, and that's further added to the pressure on oil prices this week. A long position simply means investors bought commodity (crude oil) futures in a bid to profit from a rise in prices. As prices started to fall, they sold off their positions to book profits and minimize losses.
As China, the world's largest oil importer, puts several cities under a lockdown to combat rising coronavirus cases, the possibility of a fall in demand from China has further exacerbated the sell-off in oil and gas.
In its monthly oil report released today, OPEC reiterated its previous outlook for oil-demand growth but kept this year's consumption estimate under "assessment" given the geopolitical uncertainty. OPEC also warned that the ongoing war in Eastern Europe and rising inflation in the U.S., if sustained, could hurt oil consumption.
So far, investors were pumping money into oil and gas stocks based on the surge in energy prices. A price reversal, therefore, has unsurprisingly triggered a sell-off in stocks.
Analysts are also already rethinking their ratings on oil and gas stocks. Just yesterday, Morgan Stanley analyst Devin McDermott downgraded Chevron stock's rating from "overweight" to "equal weight" as he believes the stock has started to look expensive after its recent rally, according to TheFly.com. McDermott, though, still kept his price target on Chevron intact at $166 a share. It may not be a coincidence, then, that Chevron shares closed Monday at $166.72 a share and fell today.
Notably, McDermott prefers ExxonMobil over Chevron and sees the stock more attractively valued given Exxon's efforts to cut costs and boost cash flows. Exxon also has greater exposure to downstream oil and gas activities that are more resilient to fluctuations in oil prices.
McDermott also downgraded Occidental Petroleum given the stock's stunning rally, but bumped up his price target marginally to $52 a share, driven by the company's high-quality assets and "non-oil linked cash flow."
Now what
It's hard to predict where oil and gas prices could go next, so the stocks that tanked today could head in either direction tomorrow. However, these day-to-day fluctuations should give only speculators and traders sleepless nights. Investors needn't worry as long as their long-term investing thesis in carefully picked oil stocks remains intact.
