What happened
Shares of Enbridge (ENB -1.21%) fell as much as 4.5% today before recovering to a more mild 3.6% loss by the end of Monday trading.
Even though Enbridge is mainly a North American pipeline, midstream, and storage operator, and has a lot of take-or-pay contracts that are fixed, the stock is still subject to oil and gas price fluctuations. Obviously, a pipeline operator needs its end-customer to do well in order for it to do well in the long run.
Unfortunately, Monday saw two negative catalysts happening at the same time. A prominent Wall Street analyst gave a bearish outlook for oil prices, and long-term interest rates continued their multi-month climb, putting further pressure on high-yield stocks.
So what
Oil prices have been on the rise throughout the summer to recently exceed $90 per share, following the announcement of further cuts by OPEC+ along with economic resilience in the U.S. However, on Monday, commodities analysts at Citi came out with a more bearish take on oil prices.
Citi now forecasts $82 oil in the fourth quarter and $74 average oil prices in 2024. Certainly, a slowdown in the global economy is part of the outlook, but Citi head of commodities Ed Morse also wrote that countries outside of Saudi Arabia and Russia are ramping up supply. These include the U.S., Brazil, Canada, Guyana -- and even Venezuela and Iran, which have been under varying degrees of sanctions in the past.
Oil prices were therefore retreating about 2.4% today to $88.60 per barrel as of this writing. Unsurprisingly, Enbridge's stock, as well as other energy stocks, fell in concert.
In addition to the speculation in oil prices, long-term interest rates continued their ascent today. The yield on the 10-year Treasury bond rose 11 basis points today to 4.683%. That's up more than a full percentage point since the beginning of the year, and a new 2023 high. In fact, it's the highest yield on the 10-year since 2007.
Higher long-term yields will also act as a depressant on all stocks, especially high-yielding but low-growth stocks like Enbridge, which have fixed-income-like qualities.
Now what
While investors often get sucked into buying stocks with a high-looking yield, investors would do well not to fixate on today's yield, but also what's behind those payouts. With any investment in a fossil fuel stock, there's bound to be lots of volatility, with geopolitical events, interest rates, and the behavior of central banks having an outsize influence.
In addition to volatile oil and gas prices, investors are more specifically concerned with Enbridge's recent announcement that it will acquire three natural gas plants from Dominion Energy (D -1.02%). That massive $14 billion acquisition will increase Enbridge's debt load, and highly indebted companies are vulnerable if long-term interest rates continue going up.
Given concerns over the acquisition and volatility in oil prices and rates, Enbridge's stock might be in the doghouse for a period, as investors wait to see how it digests the new acquisition and how the economy fares under the weight of higher interest rates.
