Why are oil and gas stocks going down? It boils down to this one specific company.
Oil prices have been falling as quickly as they have been rising in recent weeks, causing a major sell-off in oil and gas equities. West Texas Intermediate (WTI) and Brent crude oil prices were both down approximately 8% earlier this month, while natural gas prices were down 2.8%.
This is naturally worrying to investors. So why exactly are oil and gas stocks down?
Why are oil and gas stocks down?
As the Russia-Ukraine crisis progressed, oil prices soared to their highest levels since 2008, almost reaching US$140 per barrel on 7 March, forcing the US and its European allies to contemplate blocking Russian oil imports.
The embargo was not implemented, and oil prices began to fall soon after. Since then, oil prices have plummeted below US$100 per barrel, at the time of writing.
According to reporting outlets, major institutions like hedge funds liquidated significant sums of long positions in crude earlier this month as prices continued to fall, adding to the downward pressure on oil prices in recent weeks. A long position essentially indicates that investors purchased crude oil futures in the hopes of profiting from a price increase. They sold off their investments when prices began to decline in order to register profits and limit losses.
Just as well, the potential of a drop in demand from China, the world's largest oil importer, has compounded the sell-off in oil and gas as China, the world's largest oil importer, places major cities under lockdown to tackle growing coronavirus infections.
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Chevron Corporation and Exxon Mobil
In its most recent oil report, OPEC reaffirmed its prior forecast for oil demand growth but cautioned that given the geopolitical uncertainties, this year's consumption projection should be seen with caution. OPEC also cautioned that the ongoing war in Eastern Europe, as well as growing inflation in the United States, might stifle oil demand if they continue.
Investors have been pouring money into oil and gas firms as energy costs have risen. As a result, a price reversal has inevitably caused a stock sell-off. Analysts are revising their opinions on oil and gas stocks as well. Chevron stock was recently downgraded to ‘equal weight’ by Morgan Stanley analyst Devin McDermott, who says the company has begun to appear costly after its recent run. McDermott, on the other hand, maintained his $166 per share price objective for Chevron. It's possible that the fact that Chevron's stock closed last Monday at $166.72 a share and is still falling isn't a coincidence.
McDermott, for example, favors ExxonMobil to Chevron, believing that the stock is more competitively valued as a result of Exxon's efforts to lower costs and enhance cash flows. Exxon is also more exposed to downstream oil and gas industries, which are more immune to oil price swings. Given the stock's spectacular surge, McDermott downgraded Occidental Petroleum, but raised his price objective to $52 a share, citing the company's high-quality assets and non-oil-related cash flow.
ExxonMobil has indicated confidence in considerably higher oil and gas prices, which will help boost its upstream profitability in the first quarter of 2022. In the first quarter, XOM anticipates its upstream sector to generate a maximum of US$2.7 billion in incremental earnings. Operating income from oil and gas activities is expected to reach US$9.3 billion, the most for any quarter since 2017. After Russia's invasion of Ukraine pushed commodity prices dramatically higher, the corporation anticipates high oil and gas prices to improve profitability in its production division.
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Are gas and oil stocks crashing?
This seems to be the case, but these commodities are difficult to predict.
As nations throughout the world have restored to full capacity, energy consumption has risen significantly from pandemic-induced lows. Commodity prices have reached multi-year highs due to supply imbalances and limitations that continue to afflict the world. Oil prices have risen beyond US$100 per barrel for the first time since 2014, with West Texas Intermediate (WTI) oil prices surpassing US$100 for the first time since 2014.
This year, global demand is expected to climb by 3.67 million barrels per day, down roughly half a million barrels per day from prior projections. However, later this year, consumption is likely to reach the 100 million barrels per day milestone, which was last achieved in 2019.
While China's Omicron epidemic impacted consumption in the first quarter, the China National Petroleum Corporation expects demand to rebound in the second quarter and show positive growth in May. CNPC anticipates Chinese oil consumption to grow to 15.26 million bpd in Q3 and 15.37 million barrels per day in Q4 if COVID-19 cases stay under control, up 4.1% and 6.7% year over year, respectively.
It's no secret that the price of crude oil has a strong association with oil-related stocks. Oil business profit margins and margins benefit from higher oil prices. These instances of commodity price increases present chances for investors. With petroleum prices continuing to rise, investors should consider adding these equities to their portfolios if they haven't already.
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After years of underperformance and underinvestment, the energy industry led all sector returns for the first time in a long time last year. In recent weeks, much has been said and written about the Fed tightening and how it would bring down inflation, as well as oil costs. One thing we know for sure is that price trends tend to last longer than most people anticipate, so it wouldn't be surprising if oil prices continued to climb in the short term.
Because it's difficult to forecast where oil and gas prices will go next, today's equities might go in either direction in the coming weeks. These daily changes, on the other hand, should only keep speculators and traders up at night. Investors do not need to be concerned as long as their long-term investment thesis in well-selected oil equities is maintained.