What happened
Shares of oil and gas stocks Exxon (XOM +1.69%), Chevron (CVX +0.00%), and Devon Energy (DVN +0.71%) fell hard on Tuesday, down 3.5%, 3.1%, and 5.7%, respectively.
The culprit wasn't hard to figure out, as oil prices fell roughly 4%, and natural gas prices plunged over 10% on Tuesday. Thus, these oil and gas-sensitive stocks fell, with the more diversified Exxon and Chevron falling less than Devon, which is more directly exposed to oil and gas prices. While Chevron did close on a previously announced acquisition of Beyond6, LLC and its nationwide network of compressed natural gas stations, the stock's move was likely due to these larger macroeconomic factors.
NYSE: CVX
Key Data Points
So what
While the recent "reopening" in China spurred some recent optimism for oil demand in 2023, the resulting surge in COVID-19 cases appears to still be affecting the country's economic activity. The December 2022 purchasing managers' index (PMI) came in at 47 today, down from 48 in November, and signaled a contraction even though the country attempted to reopen fully last month.
Thus, the recent hopes for a demand boost from the Chinese economy may be fading as Covid cases surge, at least in the near term.
At the same time, the OPEC+ cartel's production actually increased slightly in December by 150,000 barrels per day. While the cartel had decided to slash its production targets over the past three months to balance out flagging demand, the cartel had already been producing less than its target to begin with. In fact, the 150,000-barrel gain only partially offset the 744,000 barrel-per-day decline in November. Nevertheless, the incremental production amid recession fears across developed countries helped send oil prices back downward today.
In addition, warm weather in Europe is enabling lower natural gas demand, and natural gas prices were absolutely plunging today, down over 10%. Remember, Russia's invasion of Ukraine had caused fears over a supply crunch this winter should temperatures stay cold. However, it looks as though Europe is catching a break, at least for now, thereby easing fears over a supply shock that emerged last year. Natural gas prices have now been more than cut in half relative to their August highs.
Now what
Both Chevron and Exxon are diversified across not only oil and natural gas production, which are sensitive to commodity prices, but also midstream and downstream operations that operate on spreads between input and end-product prices. That's why they are falling less than Devon, which is a pure producer of both oil and natural gas, and therefore a pure "price-taker."
With so many cross-currents in the oil and gas sector, it's very hard to know if prices will fall further with a recession, or if prices could rocket higher amid supply concerns and the Russia-Ukraine war. Therefore, investors should probably keep energy price-sensitive stocks as a fixed allocation as part of a diversified portfolio, then rebalance that allocation after large moves either up or down.
