What happened
Oil and gas stocks cracked Monday morning as the sell-off in crude oil prices intensified.
While China continues to be a major concern, fresh speculation about a production increase from OPEC+ has sent oil prices crashing. As of this writing, West Texas Intermediate (WTI) crude was down 5% while Brent crude oil was down 4.8% today. The sell-off is hitting some of the largest oil and gas stocks the hardest. The biggest losers as of 11:55 a.m. ET Monday included:
- ExxonMobil (XOM +0.94%): down 3.8%
- Chevron (CVX +1.16%): down 3.7%
- Kinder Morgan (KMI +2.31%): down 3%
So what
China's zero-COVID policy isn't going away anytime soon. This morning, the nation locked down a part of a major manufacturing hub, Guangzhou, and imposed fresh COVID-19 lockdown restrictions in Beijing after the city reported its first COVID death since May.
The energy sector is now bracing for a slowdown in demand from the world's largest importer of oil. In its latest research note, Goldman Sachs slashed its crude oil price forecast for the fourth quarter by $10 per barrel to $100 a barrel. Aside from COVID concerns in China, the investment bank also cited higher-than-expected oil production and exports from Russia ahead of the European Union's oil embargo, which is set to take effect beginning Dec. 5. The EU has decided to ban the imports of Russian crude oil from that day, and further ban imports of oil products from Russia starting Feb. 5, 2023.
Meanwhile, there's another development spooking oil investors today: Saudi Arabia and other OPEC producers are reportedly planning to increase oil production, according to The Wall Street Journal, which also stated the group's delegates are discussing an output increase of as much as 500,000 barrels per day. OPEC+ is expected to make an announcement at its next meeting, on Dec. 4.
NYSE: XOM
Key Data Points
Now what
Investors have placed big bets on oil stocks this year, and it's only now that their expectations appear to be faltering given how rapidly oil prices have slid in recent weeks. As is often the case, when oil prices slide, investors in panic dump shares of upstream, or oil and gas exploration and production companies, that plan their operations around commodity prices.
Take ExxonMobil's case, for example. The oil and gas giant aggressively boosted production in recent quarters to take advantage of higher oil prices. Its production in the Permian Basin, in fact, hit a record high in the third quarter.
Conversely, a midstream oil company like Kinder Morgan doesn't have to worry much about oil prices as the bulk of its cash flows are fee-based and contracted. This is why if midstream oil stocks do not rally much in an oil-price boom, they also don't fall as much during days like today when panic grips the energy sector.
Generally, though, investors in ExxonMobil, Chevron, and Kinder Morgan, shouldn't panic-sell right now. While it's hard to predict where oil prices will go, Goldman Sachs' prediction today still calls for an upside -- and not a downside -- in oil prices from here (WTI is under $80 per barrel and Brent crude around $83 per barrel right now). ExxonMobil and Chevron are some of the best oil stocks out there, and these companies are experienced enough to flex production and costs as the environment demands in order to maintain steady cash flows and dividends. Oil at $80 is also a solid level for these companies to make a lot of money, and Chevron, in fact, should announce a dividend increase within the next few weeks.
Yet, if today's developments and the drop in oil prices still make you jittery about the oil markets, Kinder Morgan should be your go-to stock on any dip right now. The 6%-yielding midstream stock is a solid bet for energy investors who want to play it safe.
