Amid a turbulent week for the equities sector, hydrocarbon energy specialists absorbed the brunt of the damage. Following the failure of two major financial institutions, many analysts raised concerns about a contagion impacting other economic sectors. Further, with monetary policy sitting on a knife’s edge, worried investors posed the question, why are energy stocks down today?
Fundamentally, all eyes are on the bank runs that eventually shuttered SVB Financial (NASDAQ:SIVB) and Signature Bank (NASDAQ:SBNY). In particular, SVB Financial acquired a significant amount of typically safe long-term government bonds when yields sat at low levels. Unfortunately for SVB, the low-interest rate environment evaporated when inflation skyrocketed last year. This dynamic forced the Federal Reserve to raise interest rates.
At that point, SVB essentially held unrealized losses, since if it were forced to sell its bonds, it would have to do so at a discount because investors can now acquire higher-yielding bonds from the open market. When higher borrowing costs combined with other economic pressures forced a liquidity constraint — particularly on the technology firms that SVB primarily serves — the subsequent bank run caught it off guard.
So, why are energy stocks down today? To clarify, several sector enterprises, including Chevron (NYSE:CVX) and Occidental Petroleum (NYSE:OXY), started the Thursday session in the red. As of this writing, many have popped their heads above water. Nevertheless, on a year-to-date basis, the Wall Street Journal points out that energy leads the market lower.
Primarily, concerns rage about the banking sector meltdown impacting other market sectors. Worse yet, those fears may not be completely unjustified.
Why Are Energy Stocks Down Today?
As a top-tier nation, the U.S. financial system should theoretically be insulated from avertable financial catastrophes. While several regional banks have failed since the 2008 financial crisis, the SVB implosion sent shockwaves because of its size. If the banking collapse spreads to other markets, it could set off a broader economic crisis.
Moreover, growing anxieties over Credit Suisse (NYSE:CS) raise major fears that the contagion may spread internationally. To be sure, Credit Suisse attempted to shore up confidence by borrowing up to $54 billion from Switzerland’s central bank. However, the move has done little to offer respite to global banks.
In addition, the Fed faces an extremely difficult choice ahead. While many analysts believe that the central bank will be reluctant to hike interest rates next week, inflation remains high. Therefore, policymakers face the excruciating choice between a likely hard landing or ditching the plane in choppy waters.
Either way, the subsequent economic damage can hurt demand for resources.
Why It Matters
Although prospects appear gloomy, not everyone is buying the energy bear thesis. Notably, Warren Buffett via Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) added more to his stake in Occidental Petroleum during the recent dip.
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.
