The stock market has certainly taken a turn for the worse. Today, all major indices are once again in the red, with most sectors experiencing significant declines. Notably, tech stocks are plunging again, and electric vehicle (EV) stocks are getting hit hard by the macro environment. However, many investors are asking the question: Why are energy stocks down today?
Indeed, it’s much easier to understand the rationale for the sector-wide declines among growth stocks. Surging inflation, and the rising rates that aim to tame this inflation, are very bearish for growth stocks. Discounting further out cash flows has become a different exercise in this environment.
That said, energy stocks are very different animals. Most energy-related companies are seeing fundamentals improve drastically in this environment. Higher commodity prices boost the balance sheets of energy companies to a greater degree than most sectors. Thus, as a hedge against inflation, energy is a core sector many investors want to be in right now.
That said, let’s dive into what’s driving today’s move lower in energy stocks.
Why Are Energy Stocks Down Today?
Looking at the heat map for the S&P 500 energy sector, it’s all red today. This group of large-cap energy players has taken a hit from lower crude prices. Today, crude prices plunged more than 4%, sending shares of many major oil and gas companies down 5% or more. Again, it’s that leveraged exposure to energy prices that’s at play — it works in both directions.
So, what’s driving this move in oil prices today?
Well, there’s the surging U.S. dollar that’s hampering all commodities of late. The U.S. Dollar Index has recently surged to its highest level in approximately 20 years. A higher U.S. dollar generally pushes down commodity prices, which are priced in USD. That’s because it simply takes fewer dollars to buy anything, if the dollar is worth more on the global stage.
Additionally, expanded lockdown measures in China are hampering global demand expectations for energy. One of the biggest consumers of oil and gas, China’s consumption matters for global energy prices. With millions locked down in Shanghai and Beijing, things aren’t looking so rosy on the demand side of the equation right 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.