What happened
Stock markets are zigzagging early on Monday after the government's closure of two midsize, tech-focused banks in recent days and as trading in another four regional banks has been halted this morning. Investors aren't certain whether the government's swift action will stem the crisis or not, and as of 10 a.m. ET most stock indexes were still mixed.
Uncertainty isn't limited to the banking sector, either. Oil stocks were down modestly as well, with Chevron (CVX +0.00%) stock slipping 1.9%, ExxonMobil (XOM +0.71%) off 2.4%, and Devon Energy (DVN +0.86%) down 3.4%.
NYSE: XOM
Key Data Points
So what
Silicon Valley Bank bought too many long-dated Treasuries in a rising interest rate environment, and then had to sell some of them at a loss in order to pay back its depositors. What does that have to do with the energy sector? Why is it taking any toll at all on oil stocks?
Well basically, when investors get nervous about the banking sector, they worry that banks may not lend as much to other companies. And when lending slows, the economy slows. And when the economy slows, consumers will buy less oil. This logic has been a drag on oil prices for the past week, with the price of a barrel of West Texas Intermediate crude oil falling by about $6 since last Monday to $74 and change -- a 7.5% drop, according to data from OilPrice.com. Outside the U.S. worries are a bit less severe, but still bad enough to send the price of Brent crude (the international benchmark) down 6.3%.
When oil doesn't cost as much as it used to, oil companies don't earn as much profit. This, in a nutshell, is why Chevron, Exxon, and Devon stocks all trended lower last week -- and why they're down again today.
Now what
And yet, selling oil stocks because of bad news about bank stocks may be a mistake.
Before the news broke last week, OilPrice was predicting a banner year for oil prices in 2023. Russian oil production is down after all, while Chinese demand for oil is rising. In fact, financial markets forecaster Refinitiv is predicting daily oil demand will grow by 2 million barrels this year, pushing Brent prices up past $100 a barrel (a near-25% increase from today's prices).
Already analysts are starting to muse that if the troubles of a half-dozen banks shake the confidence of the Federal Reserve sufficiently, there's at least a chance the Fed will now stop raising rates until things settle down a little. That could cause the economy to grow rather than shrink in the aftermath of the banking crisis, which would be good news for oil demand (and for oil prices, and for oil stocks).
At P/E ratios of just 9.1 for Chevron, 8.6 for Exxon, and a lowly 6 for Devon, there's an argument to be made for not selling these oil stocks -- but buying them instead.
