Oil stocks are under pressure on Wednesday as several catalysts knock the group lower. While oil stocks have been a standout this year — the energy sector is up 22.5% year to date while no other sector is positive — it has been stumbling over the past few weeks.
The Energy Select Sector SPDR ETF (NYSEARCA:XLE) opened higher on the day, as did crude oil futures. However, both have flipped into negative territory. The XLE ETF is down 3% on the day, while crude oil prices are down 1.5%.
So what’s the reason? Well, there are several.
First, hope was lost when recent talks between Iran and the U.S. ended without much breakthrough. The European Union mediated conversations between the two with hopes of reviving a nuclear agreement dated back in 2015, but it was to no avail. That matters to oil prices because, “lack of progress in these last ditch efforts further means there’s no full-scale return of Iranian oil to international markets on the horizon.”
Separately, OPEC+ is having trouble hitting its oil production goals. However, a return of Iranian oil could alleviate some of that missing production. “In possible relief, Iran could bring up to 1.5 million barrels a day of oil to the market if efforts to revive a nuclear agreement were to succeed, according to an OPEC-commissioned report and Iranian officials.”
However, that remains a big “if.”
Second, chatter of the United States tapping into its strategic stockpile of crude oil is causing oil stocks to move. According to President Joe Biden’s administration, it is working to release 1 million barrels of crude oil a day from its stockpiles into commercial markets. That works out to about 180 million barrels in a six-month stretch.
Finally, don’t forget the U.S. dollar. The dollar continues to gain strength, which negatively impacts commodity prices such as gold and oil.
Recession Fears Aren’t Helping Oil Stocks
Oil stocks can be down for the simple reason that energy prices are under pressure. The latter — energy — is mostly driven by supply and demand. Too little supply, like OPEC not meeting its production targets, allows prices to drift higher. So too does a rise in demand.
However, when there’s oversupply or too little demand, we see the price of the underlying commodity come down.
Given the fear of a global recession — and signs that we’re in or on the cusp of one — a decline in oil prices is quite reasonable. That’s as reduced economic activity weighs on demand for oil and gas. If demand does level off or declines, it will eventually weigh on oil stocks as well, even though these companies are practically minting cash with oil at these levels.
On the date of publication, Bret Kenwell 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.