oil prices versus energy stocks

Global oil prices have fallen to their lowest for 2022. However, there has been a divergence between oil prices and energy stocks and the latter are still outperforming the wider markets this year. Would there be a reversion now?

Oil prices are falling amid concerns over Chinese demand. The country is the biggest oil importer globally. The Chinese economy is anyways growing at the slowest pace in decades and to make things worse, COVID infections in the world’s most populous country are at record levels.

China still has a zero-COVID policy and while the country relaxed some of the restrictions, they are still quite stringent by global standards. There have been widespread protests in China which is quite uncommon in the communist government. However, despite public anger against the lockdown measures, China continues with strict enforcement of lockdown measures.

The fall in Chinese demand is a negative for oil prices. Economic growth has sagged globally also which would further dampen oil demand and by its extension oil prices.

Oil prices have been quite volatile this year. In the first quarter of 2022, prices rose to their highest level since 2008 amid concerns over oil supply after the Russian invasion of Ukraine.

However, prices soon fell off their highs and WTI prices have now been below $100 per barrel for quite some time now. Global recession fears are also keeping a lid on energy prices. While recession impacts most sectors of the economy, some of the investments are largely recession-proof.

Oil Prices Have Fallen to a New 2022 Low amid China COVID Surge

COVID controls in China have added fuel to the crash in oil prices. We also have the upcoming OPEC meeting this week where the cartel would decide on future production. The OPEC meeting would be among the key economic events for the week. Markets would also watch speeches by Fed members as well as key economic indicators, especially the November jobs report.

There were reports that the cartel is looking to announce a production increase at the meeting. However, Saudi Arabian Energy Minister Prince Abdulaziz bin Salman has denied the reports. He emphasized that the bloc does not discuss production decisions ahead of the meeting.

He also added the bloc is willing to cut production even further to balance the markets. At its October meeting, OPEC+ announced a 2 million bpd production cut amid slowing global demand.

Energy Stocks Are Still Strong despite Slump in Oil Prices

While oil prices have crashed and are now at the lowest level since December, energy stocks have largely held their ground. The energy sector is the top-performing S&P 500 stock and almost all of the top 15 S&P 500 gainers this year are energy companies.

With a YTD gain of 142%, Occidental Petroleum is among the top five S&P 500 gainers. Berkshire Hathaway, which is led by the legendary value investor Warren Buffett has also been aggressively buying energy stocks and has invested billions of dollars into Chevron and Occidental Petroleum.

Warren Buffett Has Bought Energy Stocks in 2022

Berkshire has the regulatory approval to increase its stake in Occidental Petroleum to 50% and has been gradually increasing the stake. We have a guide on how beginners can buy energy stocks.

Meanwhile, the divergence between oil prices and stock prices of energy companies has baffled many analysts. Usually, stock prices of energy companies closely follow energy prices. However, over the last few months, we’ve seen them divert.

Some analysts expect oil prices to fall more from these levels. Warren Patterson, head of commodities strategy at ING Groep NV Singapore said, “Sentiment in the oil market remains negative, and developments over the weekend in China will certainly not help.”

Jim Cramer however believes that a major buying opportunity might come next month. We have a guide on how to trade in oil.

All said the divergence between oil prices and energy stocks looks unsustainable. However, if oil prices continue to slide and market sentiments worsen, sooner than later its impact would be felt on energy stocks as well.

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