Today has been a very red day for the overall market. For energy stocks, this downside move has been more pronounced. Accordingly, many investors may be asking the question: Why are oil stocks down today?
As with any sector-specific move, there’s usually more than one catalyst at play. For energy companies such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP), Occidental Petroleum (NYSE:OXY) and Marathon Oil (NYSE:MRO), this is certainly true. These oil producers are all down between 3% and 6% at the time of writing.
It’s important to keep today’s move in context. Indeed, oil stocks have been among the biggest gainers over the past year. These stocks have moved higher on more robust oil prices and investor demand for this beaten-up sector. A rotation toward value stocks has seen energy companies’ valuations soar. Additionally, investors looking to diversify some of their gains out of tech into stocks that are seen as more stable have largely moved their capital into the energy sector and commodities.
However, it’s clear not “all is well” with oil stocks right now. Let’s dive into a couple of the factors driving these stocks lower today.
Why Are Oil Stocks Down Today?
The energy sector is really a specific commodity play. Oil producers such as the four aforementioned stocks are price-takers. Accordingly, the price of the underlying commodity (crude oil) impacts these stocks’ valuations significantly.
Unfortunately for energy investors, the trend has not been positive in this regard. Indeed, the price of oil just hit a three-month low, as investors price in increasing supply and potentially diminished demand. The previously strong outlook for energy demand coming out of this pandemic has taken a hard hit from the delta variant.
Various reports point to a weaker-than-expected energy recovery, should cases, hospitalizations and deaths continue to rise. Oil happens to be a global commodity, so when other countries (particularly in Asia) announce lockdowns, that’s very bad for the overall sector. Accordingly, oil stocks happen to be among the most economically sensitive from a global standpoint. Accordingly, this latest wave of Covid is hitting these stocks hard.
Additionally, concerns about Fed tapering has hit the broader stock market as well. Valuations of all companies are reliant on key inputs such as discount rates and risk-free rates. When these rise, the price of equities drop.
Investors are pricing in all these factors today and seem to be concluding energy is a sector to stay away from, for now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.