What happened
Shares of leading U.S. shale players Occidental Petroleum (OXY +2.06%), Devon Energy (DVN +1.31%), and Diamondback Energy (FANG +0.33%) all fell on Thursday, down more than 6% at their early morning lows, before recovering to a loss of 3.6%, 3.8%, and 3.6%, respectively, as of 2:06 p.m. ET today.
As is usually the case with synchronous moves in oil stocks, the reason was a big 3% decline in oil prices today amid several macroeconomic concerns. It appears demand destruction could be kicking in amid a slowing economy, even though supply concerns remain.
NYSE: OXY
Key Data Points
So what
Today, a combination of rising jobless claims, interest rates, and gasoline inventories all signaled oil demand could come under pressure in a slowing or recessionary economy.
On Thursday, new data from the Energy Information Administration showed an unexpected rise of 3.5 million barrels in gasoline inventories, versus an expected 400,000 barrel increase. The inventory build shows some degree of demand destruction, even though we are still at the height of summer driving season.
The U.S. also saw weekly jobless claims rise more than expected, to 251,000 versus the 240,000 forecast, and up from the prior week. That seems to indicate a cooling job market, which could also lead to lower demand and lower prices.
And the European Central Bank raised interest rates by a half-point today, its first increase in more than 11 years, and more than the expectation of 25 basis points. Tightening financial conditions could continue to squeeze oil demand lower.
Meanwhile, rising COVID-19 cases in parts of China under its strict zero-COVID policy have prompted fears of more harsh lockdowns in the country, which likely also contributed to today's lull in oil prices.
While demand fears abounded on Thursday, there was also bearish news (for prices) on the supply side. After being severely limited over the past few months, Libyan exports were expected to come back on line. The Libyan government reached a deal with protestors who had curtailed the country's oil output by as much as 50% in recent months. That renewed supply also likely contributed to oil's decline on Thursday.
None of the aforementioned individual companies had any material news out today. Warren Buffett has been buying large quantities of Occidental stock lately, in an apparent bet on the long-term sustainability of oil prices. But it appears as if a potential recession in the near term could test that thesis.
Now what
While oil prices were down today, natural gas prices were resilient, at around $8 per million British thermal units. Occidental, Devon, and Diamondback also produce natural gas and natural gas liquids in addition to oil. Natural gas is important for electricity generation, and Europe is teetering on the brink of its natural gas supplies potentially being curtailed by Russia. So investors should watch natural gas prices, not just the price of oil. It could make for a more bullish picture, even if we are in for an economic slowdown.
The oil and gas markets are quite volatile right now, with the potential for big moves to the upside and the downside. One tactic to implement might be to keep your energy sector allocation fixed as a percentage of your portfolio, adding on dips and selling on increases, given the myriad crosscurrents and unpredictability in energy markets these days.
That quantitative strategy could help take the emotion out of investing in a sector that's so important to the overall economy and inflation, thereby affecting all your other stocks, while also being subject to volatile price swings.
