What happened
Shares of Occidental Petroleum (OXY 0.02%), Devon Energy (DVN +0.32%), and Phillips 66 (PSX +0.64%) fell hard on Wednesday, down 4.3%, 6.1%, and 4.6%, respectively.
Although oil prices were trading higher in the morning, they fell by the late afternoon, down around 2% as of this writing. It appears today was a day of recession fears, as first-quarter U.S. GDP figures were revised downward, and Fed Chair Jay Powell reiterated his hawkish posture at a conference in Europe.
Cyclical stocks such as energy names tend to do badly in a recession, but have fears gone too far? Warren Buffett appears to think so.
NYSE: OXY
Key Data Points
So what
Earlier in the day, U.S. GDP figures for the first quarter were revised downward from a 1.5% contraction to a 1.6% decline. Of note, consumption was still positive in the first quarter, but imports and inventory builds made for a technical negative GDP print. Still, the downward revision reflected slightly weaker growth, which likely weighed on cyclical stocks.
The recession fears were compounded by continued hawkish comments from Powell, who spoke at at a conference in Europe earlier today. He said:
The risk is that because of the multiplicity of shocks you start to transition to a higher inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening... There's a clock running here, where we have inflation running now for more than a year... It would be bad risk management to just assume those longer-term inflation expectations would remain anchored indefinitely in the face of persistent high inflation.
Reading between the lines, that appears to mean the Fed will continue to hike rates aggressively to get inflation down no matter what it takes, even if that potentially means a recession. Even though there are tight supplies of oil, fears over softening demand going forward likely caused the price of crude to fall, taking these oil-sensitive stocks along with it. Of note, Phillips 66 is only a refiner and pipeline company, but if end-product demand goes down, Phillips will suffer too, just as the exploration and production companies would.
Today's declines reversed a nice bump yesterday for the sector, and for Occidental Petroleum in particular. That's because a regulatory filing filed late Monday revealed Warren Buffett's conglomerate Berkshire Hathaway (BRK.A +0.03%) (BRK.B 0.05%) had purchased even more shares of Occidental, adding to its already-sizable stake in this U.S. oil producer.
Now what
Who knows what oil will do next? While prices could plunge if we have a bad recession, oil could also surge if we don't, since supplies across the globe appear to be tight. Due to sanctions on Russia, Russian oil could struggle to hit the markets, and Russia may even be challenged to maintain production growth, as the country loses access to equipment and technology.
Meanwhile, as recently as Monday, French President Emmanuel Macron warned President Biden that Saudi Arabia and the UAE don't have much spare capacity, as some might have assumed. As summer driving season heats up, we could very well see oil prices rise again. It appears at least Warren Buffett is still very bullish on oil prices, as evidenced by his increased stake in Occidental.
As I've been reiterating recently, investors should figure out how much exposure they want to the energy sector, either through individual stocks or ETFs, and try to keep that exposure fixed as part of a diversified portfolio, selling after big increases and adding on declines. Since it's highly possible we could have continued supply shocks, at least some exposure to the sector is probably warranted, if only for hedging purposes. That mechanical, mathematical view is probably best in such a volatile sector on top of a volatile market.
