Today has been a rather mixed bag for investors. In particular, oil stocks are some of the bigger losers in the market right now. Industry juggernauts like Occidental Petroleum (NYSE:OXY), Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) are all dropping between 1% and 4% lower.
Any time stocks in a given sector move in sync, it’s generally consistent with some macro catalyst. Today, that’s certainly the case. Just look at oil prices. Most global benchmarks for crude are down another 7%. For these mostly-U.S. producers, the fact that West Texas Intermediate (WTI) now trades around $96 per barrel could provide some downward pressure over the near-to-medium term.
Investors are pricing in some less-rosy numbers in the future as oil prices come down. These producers benefit in higher oil price environments, with operating leverage providing amplified upside as commodities rise. But this also works in reverse. Today’s moves are driving valuation compression in the oil sector.
Let’s jump into what’s taking the price of oil — and therefore oil stocks — down today.
Why Are Oil Stocks Down Today?
Like most globally traded commodities, macro factors weigh heavily into the calculation when it comes to determining the price of oil. Supply and demand are the two factors that really matter.
On the supply side of the equation, all indications are that most producers are operating near capacity. Therefore, it’s really demand that’s in focus right now. Specifically, demand in China — or lack thereof — has been driving oil prices lower. Shanghai recently announced plans for additional Covid-19 testing, stoking new lockdown worries. That’s dragging on oil prices as investors consider a possible supply glut.
Additionally, the BA.5 omicron subvariant in the U.S. is also stoking demand concerns. Along with existing recession fears, this has led investors to factor in potentially depressed global demand. That’s not a positive recipe for oil stocks.
We should get more clarity on these factors in the coming weeks. However, for now, investors appear to be remaining cautious. Caution will likely be a theme for the foreseeable future, too.
On the date of publication, Chris MacDonald did not hold (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.
