What happened
It's Friday morning -- two days after the Federal Reserve raised interest rates 0.75%, and one day after seemingly every other central bank in the world followed suit, according to The Wall Street Journal -- and oil stocks are tanking.
As of 9:50 a.m. ET, shares of oil company Occidental Petroleum (OXY +1.82%) are down 5.6%, while industry bellwether ExxonMobil (XOM +0.30%) is down a solid 6%, and refiner Phillips 66 (PSX 0.29%) is leading the pack lower with a 6.7% loss.
NYSE: PSX
Key Data Points
So what
Rising inflation and central banks' efforts to curb it by raising interest rates -- even at the cost of potentially sparking a global recession -- explain most of today's selling. As the Journal explained, "the higher the Fed raises rates, the greater the risk that it will go too far, tipping the economy into a recession."
At the same time, higher interest rates can weigh on heavily indebted companies, and oil companies are notorious for carrying high debt loads. Phillips 66, for example, has more than $11.2 billion in net debt on its books. Occidental has $21 billion more debt than cash, and Exxon -- $28 billion.
NYSE: XOM
Key Data Points
Pricing these fears into the market, West Texas Intermediate crude oil prices tumbled 5% this morning, to barely $79 a barrel, while Brent crude is down a similar 4.3% at $86 and change. Thus, at the same time as oil stocks face the prospect of higher interest costs on their debt, the value of their primary product is dropping -- potentially squeezing profit margins from both ends if these trends continue.
Now what
That's the bad news. Now here's the good: While economies worldwide could tank in the coming year, the hard truth is that economies could tank in any year. It's really hard to make predictions -- especially about the future -- and predictions of the coming recession, and its potential length, are just as easily wrong as right.
At the same time, as OilPrice.com reports today, demand for oil may be rebounding in China as COVID-19 restrictions start to ease, bans on the import of Russian oil in the West continue to snarl supply chains, and OPEC is threatening repeated cuts in oil production -- all factors working to keep oil prices elevated.
NYSE: OXY
Key Data Points
Meanwhile, the higher worries rise, the cheaper oil stocks seem to get. At barely six times trailing earnings, Occidental Petroleum stock is currently the cheapest of this bunch, and at seven earnings, Phillips 66 isn't much more expensive -- especially when you factor that company's mammoth 4.8% dividend yield. For that matter, ExxonMobil at 10 times earnings and paying a 3.9% dividend seems far from expensive.
Given the valuations, I'd be much more inclined to see today's oil stock sell-off as a buying opportunity than a reason to sell.
