Crude prices could remain muted in the near term due to continued macroeconomic uncertainty and some supply and demand dynamics. However, oil appears poised to rebound later this year. This means now might be the perfect time to buy oil stocks, since many have followed oil prices lower in recent months.
Oil prices have fallen from their peak, largely due to macroeconomic worries. While that weight could remain on oil prices in the near term, crude appears poised to bounce back sharply later this year as demand begins to outstrip supplies in the second half. This means now might be the perfect time to buy oil stocks before the rebound.
The last three years have been very exciting for energy stocks, with deep declines and massive rallies. The driving force, as always, has been the inherent volatility of energy prices. This is actually normal, not unusual. Which brings up the ongoing question: Is now the time to buy oil stocks
If you are looking at oil stocks there's a very good reason to be fearful. In simple terms, what goes up eventually comes down in a cyclical industry like energy. And with the world potentially on the brink of a recession, demand for oil could end up falling in very short order. That would put downward pressure on oil prices, which have run up dramatically since their pandemic-driven lows in 2020. That period, however, is important to understand because it was marked by a rapid decline in demand, which is what a recession would also lead to.
The risk here was recently put on display when Pioneer Natural Resources (PXD 1.08%) cut its oil-linked dividend by 33%. Pioneer isn't a bad company, but the ups and downs of oil prices have a direct impact on the dividends it pays and the most recent payment proved that oil prices don't go up forever. If there is a recession, expect oil-linked dividends across the energy patch to plunge. That will likely be the case with oil stocks, as well.
Then there's the issue of the clean energy transition that's taking shape. Investors interested in environmental, social, and governance (ESG) issues are clearly against less-than-clean energy companies like oil producers. That negative sentiment isn't going to change anytime soon, particularly as the longer-term impacts of global warming become more and more apparent. That's a headwind for the business and for investor sentiment, which will likely increase volatility in the sector.
All four of these companies offer generous and growing dividends. Exxon and Chevron have multidecade increase streaks going, which makes them stand out for dividend consistency. Shell cut its dividend at about the same time that it started to shift aggressively toward clean energy, but the dividend is back in growth mode. TotalEnergies didn't cut its dividend when it made that shift, but dividend growth hasn't been nearly as robust as Shell's. All four companies, meanwhile, are fairly cautious ways to play the oil industry.
There's an interesting dichotomy taking shape today in the energy sector. Oil prices have fallen lately, but the stock prices of oil producers like ExxonMobil (XOM 0.15%) have remained fairly strong. Given the tie between the price of oil and the profits of oil companies, that suggests that now is a time for caution. Here's a deeper look at why.
In 2020, governments around the world effectively shut down their economies in an attempt to slow the spread of the coronavirus. That resulted in a swift drop in demand for oil and natural gas. The energy industry was hit very hard, with oil prices in the United States actually falling below zero for a brief moment in time. Although this was a short-lived event, think about what it means -- producers were paying customers to take oil off of their hands.
To put some numbers on this, integrated energy giant ExxonMobil lost $22.4 billion in 2020. That's a loss of about $0.33 per share, which makes the drop seem less severe. However, when you compare that per-share loss to the $2.25 it earned in 2019, you start to see just how terrible a year it was. ExxonMobil, like many of its peers, ended up adding debt to its balance sheet just so it could muddle through. The company's debt-to-equity ratio roughly doubled during that year, peaking at more than 0.4 times. To be fair, that's still a fairly modest debt ratio, but the rapid increase was jarring to many investors, with some worried that the dividend would need to be cut.
Given that information, it shouldn't be too shocking to see that the stock has risen dramatically since hitting a low point in 2020. And that's the way things go in the oil industry, generally speaking. Oil and gas prices go down, and so do energy stocks. Oil and gas prices recover, and so do energy stocks. The best operators use the good times to prepare for the bad, noting that ExxonMobil's debt-to-equity ratio has fallen back to its pre-2020 level again as it's used its huge profits to strengthen its balance sheet.
But, given the nature of the industry, investors need to start thinking about the downside when times are good. This brings up a strange event that's taking shape right now. While energy stocks like ExxonMobil continued to perform well, oil prices have retreated from the peak levels of 2022. Some oil companies have even come out and warned that fourth-quarter 2022 results would likely be down from earlier in the year.
Although there's no way to predict where oil and natural gas prices will go next, the fact that ExxonMobil's stock isn't tracking along with oil like normal is a worrying trend. It suggests that now is a time for caution, not aggressive actions. To be fair, ExxonMobil is diversified, financially strong, and probably a good option for investors looking at the energy sector today. But that's largely because it has proven it can survive industry downturns, not because it is a screaming buy.
Oil is a commodity, and it has dropped from recent peaks. That's likely to lead to weaker results at energy companies, even industry Goliaths like ExxonMobil. That fact hasn't flowed through to stock prices yet, but history suggests it eventually will, which makes now a time for caution in the energy patch. For most investors, it would be better to stick to a financially strong and diversified name like ExxonMobil than to chase after a tiny wildcatter that's highly leveraged to energy prices, given the current industry dynamics.
\"Energy stocks have performed well as management teams have shifted to returning cash to shareholders,\" says Rob Thummel, senior portfolio manager at TortoiseEcofin. \"We expect capital discipline to remain in place so capital expenditures and production growth will remain low while dividends and stock buybacks will grow.\"
Thummel says the biggest risk is a deep global recession that dampens energy demand, while a secondary risk is that oil prices rise too high for an extended period of time, also causing demand destruction.
\"The biggest impediment for the U.S. energy sector to grow is attracting and retaining people,\" he says. \"Drilling for oil and gas is very labor intensive. The negative sentiment associated with the sector over the last several years has kept people from entering the industry.\"
Marathon Petroleum is an independent oil and gas refiner focused primarily on the U.S. Midwest, West Coast and Gulf Coast regions. It refines crude oil and other feedstocks, purchases ethanol and refined products for resale, and distributes the products using barges, terminals and trucks owned or operated by the company. Its Speedway retail business segment sells transportation fuels through more than 2,700 stores. The company also owns and operates crude oil and refined product pipelines.
Geopolitical events and severe weather that disrupt the supply of crude oil and petroleum products to market can affect crude oil and petroleum product prices. These events may create uncertainty about future supply or demand, which can lead to higher volatility in prices. The volatility of oil prices is tied to the low responsiveness, or inelasticity, of supply and demand to price changes in the short term. Crude oil production capacity and the equipment that uses petroleum products as its main source of energy are relatively fixed in the near term. It takes time to develop new supply sources or to vary production, and when prices rise, switching to other fuels or increasing equipment fuel efficiency in the near term is challenging for consumers to do. These conditions may require a large price change to rebalance physical supply and demand.
Given the history of oil supply disruptions caused by political events, market participants constantly assess the possibility of future disruptions. In addition to the size and duration of a potential disruption, market participants also consider the availability of crude oil stocks and the ability of other producers to offset a potential supply loss. When spare capacity and inventories are low, a potential supply disruption may have a greater impact on prices than might be expected if only current demand and supply were considered.
Weather also plays a significant role in the supply of crude oil. Hurricanes in the Gulf of Mexico can affect oil production and refinery operations in the Gulf region. As a result, U.S. petroleum product prices may increase sharply as supplies from the Gulf to other regions drop. Severe cold weather can also strain product markets as producers attempt to supply enough product, such as heating oil, to consumers in a short amount of time. This seasonal demand can also result in higher prices.
IEA member countries are required to ensure oil stock levels equivalent to no less than 90 days of net imports and to be ready to collectively respond to severe supply disruptions affecting the global oil market. Member countries have substantial flexibility in how they meet the stockholding obligation, which can include stocks held exclusively for emergencies and stocks held for commercial purposes (both in the form of crude oil and as refined products), as well as holding stocks in other countries under bilateral agreements. Each Member country is thus able to determine how to fully meet their IEA stockholding commitment in the manner most appropriate to their domestic circumstances. 59ce067264