What happened
Shares of ExxonMobil (XOM 1.37%), Chevron (CVX 0.63%), and Phillips 66 (PSX +1.93%) plunged on Friday, down 5.6%, 5.6%, and 5.7%, respectively, as of 1:43 p.m. ET. The sector was an outlier, as the broader indexes were rallying at that time.
As is usually the case when there are big moves across multiple large oil stocks, or any stock in the same sector, there wasn't any material news out of these three companies at the individual level. Rather, the synchronous move had to do with macroeconomic concerns. Specifically, oil prices plunged today, down more nearly 7%, as oil traders appeared to begin pricing in a potential recession.
NYSE: XOM
Key Data Points
So what
Earlier this week, the Federal Reserve raised the Federal Funds Rate by 75 basis points, the most aggressive single-session tightening since 1994, in an effort to bring down inflation. Unfortunately, with inflation beginning to metastasize into the broader economy, the Fed might have to force the economy into a recession in order to control prices.
Moreover, a higher U.S. interest rate strengthens the dollar. With oil priced in dollars worldwide, a stronger dollar means a low oil price, and vice versa.
That's never great for the oil markets and the oil sector, which had been the one standout performer this year. If the Fed forces a recession, and with consumers beginning to feel more pain at the pump, demand destruction could set in. Additionally, some large investors might be rotating out of the sector and into more recession-resistant names.
In addition, China has struggled to reopen its economy under its zero-COVID policies. Although Shanghai officially reopened last week, parts of the city were put back under lockdowns this week as an outbreak surfaced amid mass testing. Parts of Beijing were also shut down after a popular bar caused a super-spreader event.
It appears China's lockdowns could continue popping up periodically throughout the year, absent a change in policy. That could reduce demand, on top of a potential economic downturn in the U.S.
With oil prices touching a yearly high to begin the week, it's not too surprising that stock prices are coming down -- although today's decline was certainly very big and sudden.
Now what
Energy has been the standout sector this year while virtually every other part of the market has plunged. Some would say this decline has been overdue in this cyclical sector, but the dynamics of the oil market are very difficult to read one way or the other right now.
On the one hand, high prices, Fed rate hikes, and China lockdowns could destroy the strong demand we've seen this year. And while the U.S. is growing its production slowly but surely, with seven rigs added in the last week, the OPEC+ countries are actually struggling to ramp up their supplies due to technical constraints. The supply struggles from OPEC+ could keep a floor under oil prices over the next year, so oil might not plunge as far as recession-worriers might think.
On the other hand, an end to the war in Ukraine could cause oil prices to fall further, should that happen.
Basically, there is a huge amount of uncertainty in the oil market right now. If you're investing in this sector, make sure to have your own long-term view on the duration of the fossil fuel industry; also, if you have traditional energy as a fixed percentage of a diversified portfolio, try to keep it at that level and stick to your plan, selling on surges or adding on big dips when they happen, in order to keep that allocation steady.
