Crude oil prices have been soaring for quite some time now on the global market. Indeed, the cut in oil production from OPEC producers has dramatically increased the price of crude oil in the energy market. However, energy stocks have been lagging behind the commodity they track by a significant margin, according to oilprice.com.
Moreover, according to the same source, the cut in oil production from Russia and Saudi Arabia seemed to be effective, with commodity analysis estimating that global markets could be currently facing a deficit of as much as 3 million barrels per day. This implies that the rally is in-line with market fundamentals, unlike the previous situation where market sentiment was extremely bearish despite early signs of tightening supply. Thus, energy stocks should follow the trend of crude oil prices. But surprisingly, energy stocks have only managed a 14% gain over the timeframe, while its 6.5% return in the year-to-date badly lags the S&P 500’s 15.2% gain over the timeframe.
As a matter of fact, there are a few reasons why oil stocks are lagging behind soaring crude oil prices. First, the concern about a recession still looms large. The Federal Reserve is raising interest rates aggressively in an effort to combat inflation. This is raising concerns about a potential recession, which would dampen demand for oil and reduce the profitability of oil companies.
Second, the strength of the U.S. dollar. The US dollar has strengthened significantly against other currencies in recent months. This makes oil more expensive for buyers outside the US, which could reduce demand.
Third, the increased supply. As was aforementioned, the Organization of the Petroleum Exporting Countries (OPEC) and its allies have agreed to increase production in recent months. This is helping to boost supply and keep oil prices in check.
Fourth, investor’s sentiments. Investors may be wary of oil stocks due to their volatility and the potential for a recession.
The threat of a recession remains perhaps the major reason why oil stocks are lagging behind crude oil prices. In a recession, economic activity slows down, which leads to a decrease in demand for oil. This can cause oil prices to fall, which would reduce the profitability of oil companies. In addition, during a recession, investors may become more risk-averse and sell off cyclical stocks, such as oil stocks. This could further depress oil stock prices.
The severity of the impact of a recession on oil stocks would depend on the severity of the recession itself. A mild recession may have a relatively limited impact on oil stocks, but a severe recession could lead to a sharp decline in oil stock prices.
It is important to stress, however, that part of the reason why oil stocks are lagging behind crude oil prices could be that the stocks had outpaced oil prices earlier in the year, and oil is just now catching up. But it appears to reflect expectations for oil and the broader economy. Indeed, the futures market is predicting a drop-off in oil prices next year, with Brent futures expiring next May trading at $88.