What happened
Shares of major oil stocks, including diversified majors Chevron (CVX 0.57%), ExxonMobil (XOM 0.39%), and pipeline giant Kinder Morgan (KMI -0.32%) all fell on Tuesday, declining 2.4%, 3%, and 2.6%, respectively, as of 2:41 p.m. ET.
The entire market was down today, as recession fears appeared to loom over most stocks. A recession of course wouldn't be good for any commodity, oil and gas included. In addition, the government's energy agency lowered its outlook for oil prices next year, adding to the bearish overhang on oil and gas names especially.
So what
On Tuesday, the U.S. Energy Information Administration (EIA), a government agency, lowered its average oil price forecast for 2023 to $92, down from an expectation of triple-digit oil prices earlier this year and a $95 forecast last month.
The agency wrote, "This forecast leaves global oil inventories higher at the end of 2023 than we had forecast in the November STEO, which results in our Brent crude oil price forecast averaging $92 per barrel (b) in 2023, $3/b less than we had forecast last month."
The new outlook stems from a lowered outlook for the U.S. and global economy, as the EIA now sees a "slight contraction in the U.S. economy" in the first half of 2023. The EIA also boosted its outlook for natural gas production, which could limit natural gas prices next year, after a short-term rise during the winter months.
Of course, that oil price forecast is still higher than the current $74.24 oil price as of this writing; still, just as stocks often decline following sell-side analysts lowering their price targets, even if those targets remain above the current stock price, the incremental move downward is putting pressure on already-bearish sentiment for oil and gas stocks today.
The EIA report is only adding to the overall downbeat mood of the past few days, as investors now fear larger Federal Reserve interest rate hikes going into next year. Last week's better-than-expected jobs and wages report, combined with yesterday's better-than-expected services PMI reading, are paradoxically increasing the odds of recession in some investors' eyes. That's because these hotter numbers may necessitate higher interest rates, and the higher interest rates have to go, the less likely the Fed can engineer a "soft landing," which means defeating inflation without causing economic damage and high job losses.
Now what
The oil and gas markets have been especially confusing and volatile this year, both to the upside and the downside. With the Strategic Petroleum Reserve releases ending, a price cap on Russian oil purchases just implemented on Dec. 5, and various calls for a recession of varying degrees next year, it's very hard to know whether oil will soon have a supply-driven rally, or a recession-driven plunge.
As I usually advocate, oil and gas prices have proven to be very important for the global economy, as the renewable transition is not yet big enough to overcome movements in fossil fuel prices. Therefore, dedicating a specific allocation to stocks sensitive to oil and gas prices may be the best course of action, if only to hedge against other parts of your portfolio.
Of course, if the global economy falls into a deeper-than-expected recession, it's likely both oil and gas stocks as well as most other stocks would fall. Still, traditional energy stocks should likely be part of any diversified investor's portfolio, as this sector has still managed to gain overall in 2022 despite today's decline, helping to mitigate the larger declines in the broader markets.
