What happened
The value of oil and gas stocks fell on Monday as investors prepare for a Federal Reserve meeting on Wednesday. Hopes of a few weeks ago that short-term interest rates would rise by only 50 basis points have all but disappeared and some analysts are expecting a full 100 basis point increase, which would be the biggest rate increase in 40 years. This has resulted in a decline in energy markets, which are generally driven by growth in economic activity.
Notable movements have come from western oil (OXY 2.37%)which fell 3.3% in morning trading; ExxonMobil (XOM 4.04%)which fell by 2.4%; Diamondback Energy (CROC 2.25%), down 3.6%; and offshore platform owner Transocean (PLATFORM 3.45%), which fell 4.3%. The shares were down 0.6%, 0.6%, 1.3% and 2.6% respectively as of 3 p.m. ET.
So what
The biggest concern for investors today is that interest rates will rise so rapidly that the economy will enter a recession or deepen an existing recession. That could hurt demand for oil and send the value of West Texas Intermediate (WTI) crude oil down as much as 3.5% in Monday morning trading to a low of $82.10. Market sentiment has changed quickly and WTI crude is currently at $85.73 per barrel, up 0.7% on the day.
You can see below that oil company stock prices generally track the value of crude oil, which makes sense as this is the company’s production. Apart from Transocean, all these companies are highly correlated to the price of oil.
The economic backdrop is shaping up as crude oil production in the United States increases. Oil rigs are slowly coming back online and they are much more efficient than they were a decade ago, bringing the United States closer to pre-pandemic production levels.
Now what
High prices and growing demand have been a boon for oil companies and investors may see the opposite right now. Prices have been falling for months and demand may be next if the Federal Reserve has its way.
Meanwhile, rising interest rates will eventually lead to higher borrowing costs for oil companies, which are typically highly leveraged. You can see below that these four companies have significant debt.
Add it all up and it’s no surprise that oil and gas stocks are falling today. The move could have been bigger, but as I mentioned, the value of oil rallied later in the day.
Oil and gas companies have done a good job cutting capital spending to improve profitability in 2022, but that doesn’t mean the trend will last. Commodities are always subject to the forces of supply and demand and right now the supply is increasing. If a global recession hits, that would be bad for demand. This is what investors have in mind today.