What happened
Extending their losing streak from last week, oil and gas stocks sank further today, with heavyweights getting hit the hardest. As of 11:50 a.m. ET, here's how much some of the large oil stocks had fallen in value:
- Chevron (CVX 0.37%): Down 4.7%.
- ExxonMobil (XOM -2.78%): Down 6.8%.
- Phillips 66 (PSX -3.71%): Down 6.6%.
So what
Oil prices caused the meltdown in stocks today.
As of this writing, both prices of Brent crude and U.S. oil benchmark West Texas Intermediate (WTI) crude were each trading roughly 5.5% lower. Specifically, oil prices tumbled to near two-week lows and are now significantly below their multiyear highs hit in March.
Blame China.
Image source: Getty Images.
The conflict between Russia and Ukraine was largely why oil prices skyrocketed in recent weeks. While the war continues to rage, the latest developments in China have triggered fears of a slump in the demand for oil.
China is grappling with its worst coronavirus outbreak yet and has put several parts of the nation, including financial hub Shanghai, under strict lockdowns under its zero-COVID policy. This past Sunday, Beijing also kicked off mass testing after a spike in COVID-19 cases and shut down several residential and commercial districts today.
It appears the lockdowns are not only intensifying but spreading to more parts of China, which is bound to hit consumption and manufacturing activity. That could also mean a slump in the demand for oil, as China is the world's largest oil importer. Not surprisingly, oil prices crashed today, taking stocks across the industry along for a ride, especially upstream oil producers like ExxonMobil and Chevron.
Oil producers are most susceptible to the volatility in oil prices as prices largely decide how much oil these companies can and want to drill at any point. The higher the prices, the higher the incentive to spend money to explore and drill oil.
Lower prices of oil, though, don't bode well for refiners and downstream companies like Phillips 66, either, because that hurts refining margin, or the spread between the prices of oil and refined products. For that matter, ExxonMobil and Chevron are integrated companies that operate across upstream, midstream, and downstream segments.
Now what
The timing of the fall in oil prices is also making investors in oil and gas stocks jittery -- the earnings season has arrived, and investors fear the best days for some stocks might be over.
In fact, ExxonMobil, Chevron, and Phillips 66 are all set to release their first-quarter numbers on April 29. All three delivered stellar numbers last quarter as higher prices drove upstream and refining earnings. With oil prices rising substantially since, these oil giants should report strong numbers yet again this week. ExxonMobil, for example, stated earlier this week through a regulatory filing that a change in liquids prices since the fourth quarter could boost its first-quarter upstream earnings by nearly $1.9 billion to $2.3 billion.
However, with these stocks having run up so high this year, investors perhaps don't see much upside left especially now that oil prices are cooling off. They're therefore dumping shares ahead of earnings. That might make sense for traders, but long-term investors should focus on more important metrics like debt, cash flows, and dividends instead of quarterly numbers that can fluctuate dramatically for oil and gas companies.
Chevron, for example, said in March it has become a lot more cost and capital efficient, such that it should be able to generate strong cash flows and support bigger dividends even at oil prices of $60 per barrel. These are the kind of announcements you'd want to watch out for this week instead of betting on unpredictable oil prices.
