Crude oil made an interesting move yesterday… it fell more than 6% to $95.28 a barrel, a level it hasn’t seen since April 12.
The reason behind the break below $100? An increase of COVID-19 cases in Beijing, which triggered mass testing and more lockdowns. Even the Shanghai composite stock index took a hit, posting its worst day since February 2020. The CSI300 index plunged 4.9% to 3,814.91.
The selloff comes on the heels of Beijing announcing over the weekend that it had hit a new record of daily deaths. The truth of the matter is there are concerns that the Chinese economy will grind to a halt if the lockdowns continue. In fact, the International Monetary Fund (IMF) slashed its full-year China GDP growth estimate to 4.4%, down from initial expectations for 4.8% in January. This is also well below the IMF’s projections set back in October for China GDP growth of 5.6%.
Meanwhile, Bank of America (NYSE:BAC) expects China full-year GDP growth of 4.8%, while UBS predicts full-year China GDP growth to slow to 4.2%. JPMorgan & Chase (NYSE:JPM) lowered its full-year China GDP growth to 4.6%, down from previous expectations for 4.9%. Barclays cut its full-year GDP growth expectations to 4.3%, below earlier expectations for 4.5% GDP growth.
Interestingly, Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) maintained their China full-year GDP growth forecasts at 5.1% and 4.5%, respectively, largely because of China’s strong first-quarter economic report earlier this month. The Chinese economy grew 4.8% in the first quarter, topping analysts’ expectations for a 4.4% increase.
But the reality is China’s energy demand is already down significantly. Bloomberg reported that China’s demand for gasoline, diesel and aviation fuel is expected to slip 20% year-over-year. In other words, demand is expected to fall to approximately 1.2 million barrels a day.
Following China’s lockdowns, some analysts believe that oil demand will fall. For example, Claudio Gailmberti, Rystad Energy’s senior vice president of analysis, noted that:
“Oil demand is set to shed 1.4 million barrels per day, dropping below the highs set in 2019, with a rebound unlikely until at 2023 … Market hawks will be closely monitoring Beijing’s decisions regarding lockdowns in the coming days as an indicator of additional oil demand impacts.”
Currently, Rystad expects that oil demand will average 99.6 million barrels per day in 2022. This compares to a pre-pandemic high of 100.2 million barrels per day in 2019.
Edward Moya, a senior market analyst for OANDA, stated, “The hit from Chinese lockdowns is over a million barrels a day and the testing of 12 districts over the next five days will determine the next major move for crude oil prices.”
Marshall Steeves, energy markets analyst at S&P 500 Global Commodity Insights, also stated that the lockdowns in China provinces are “seriously denting petroleum demand there.”
Given the growing concerns that demand for oil is ebbing, energy stocks also took a hit. In fact, the Energy Select Sector SPDR Fund (NYSEARCA:XLE) slipped 3.3% yesterday. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) dipped about 2%. Both ETFs are down more than 7% in the past five trading days.
Year-to-date, though, XLE and XOP are up more than 30%. Personally, I don’t believe the run in energy stocks is over just yet. The reality is energy stocks are going to have the best earnings this earnings season because they’re making windfall prices from the jump in oil prices. And I’m not alone. According to FactSet, the energy sector is expected to post a 259.4% year-over-year increase in earnings and revenue is forecast to jump 11.1% year-over-year. Energy companies that report better-than-expected earnings results should see their shares bounce like fresh tennis balls.
So, it’s no surprise that the big oil companies like BP p.l.c. (NYSE:BP), ConocoPhillips (NYSE:COP), Chevron Corporation (NYSE:CVX), Devon Energy Corporation (NYSE:DVN) and Exxon Mobil Corporation (NYSE:XOM) rate so highly in my Portfolio Grader.
As you can see in the Report Card above, each stock earns an A-rating for its Quantitative Grade, indicating that it is experiencing persistent institutional buying pressure. And with the exception of BP and CVX, the Fundamental Grades are relatively solid, too.
I should add that while inflation likely “peaked” in March and is expected to decelerate somewhat in the upcoming months, the biggest inflation deceleration isn’t expected to occur until September and October. This is when worldwide energy demand typically ebbs as season demand drops as the Northern Hemisphere cools. Since there are more people in the Northern Hemisphere than the Southern Hemisphere, energy demand naturally declines in the fall as mild weather arrives.
In other words, oil demand and prices will remain elevated for some time, which bodes well for energy stocks.
In fact, energy stocks are bouncing back nicely today after crude oil broke back above $100 per barrel this morning after the People’s Bank of China reassured investors that it will continue to support its economy. It stated this morning that it will:
“Further give play to the sound monetary policy to intensify support for the real economy. In particular, we will extend support to the industries, micro and small businesses (MSBs), and self-employed traders hard hit by COVID-19, to agricultural production, and for secure and increased supply of energy.”
The rebound in energy stocks is especially impressive considering the broader market’s tumble today. The S&P 500 and Dow fell more than 1%, while the NASDAQ plunged more than 2%.
The bottom line: Energy stocks should not fall out of favor any time soon. However, it’s important to note that not every energy stock is created equal. Energy companies that boast strong sales and earnings growth, as well as provide positive future guidance, should walk away as the winners.
If you’re not sure which to look for energy stocks, you’ll want to consider my Growth Investor Buy Lists. The fact of the matter is I’ve been loading up my Buy Lists with fundamentally superior energy stocks over the past few months, and I will be recommending three more energy-related stocks in my Growth Investor Monthly Issue for May on Friday.
So, if you join me at Growth Investor today, you’ll be just in time to receive my brand-new energy stock recommendations on Friday, as well as two other stocks that are great long-term buys. I’ll also release my latest Top Stocks lists, all of which are also tied to the energy and commodity sectors.
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The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: