Easily one of the most frustrating investments of this year, offshore drilling contractor Transocean (NYSE:RIG) earlier enjoyed an unprecedented bullish phase. It was first from the cynical impact of rising inflation and later from the Russian invasion of Ukraine driving prices even higher. Given that these factors don’t appear to be waning anytime soon, circumstances seem to support RIG stock. Nevertheless, shares tumbled over 5% during the Apr. 11 session.
Although the disrupted global order probably will not heal for quite some time, another factor that has bolstered crude oil prices may now be sliding off the table: economic growth. According to a recent CNN Business report, the “global economy is catching up to high prices, and investors are getting a case of the butterflies.”
Most worryingly, China put Shanghai and other major cities on lockdown due to rising coronavirus cases. This is significant because unlike other nations, which have decided to adopt policies that protect commercial interests, Beijing has embarked on an all-or-nothing approach. While such a move may be healthier for its citizenry, it raises red flags regarding future economic stability.
According to data compiled by Statista.com, Shanghai represents 3.8% of China’s gross domestic product (GDP). That its government is willing to sacrifice such output sent ripple waves across the world — and it is finally reaching formerly lucrative oil-related trades like RIG stock.
Combined with the crisis in Ukraine — which appears to have no offramp with neither side of the conflict ready to negotiate — along with domestic inflationary pressures hurting consumer sentiment, it is possible that energy demand might decline. If so, RIG stock won’t be able to justify its lofty valuation, posing significant concerns for stakeholders.
While the issue of an upcoming recession is a debatable one, that the once high-flying energy sector suffered a sharp correction is a reminder that consumer strength has its limits. Therefore, it is probably best to approach RIG stock cautiously.
On the date of publication, Josh Enomoto 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.
