oil stocks

While the wider markets have looked weak and both the Nasdaq and S&P 500 are in a bear market, oil stocks have looked strong. The top 15 gainers in the S&P 500 this year are companies in the energy ecosystem.

Crude oil prices have held up strong this year after Russia’s invasion of Ukraine. While analysts have been turning bearish on the markets and many see S&P 500 falling towards 3,500, most have a bullish view of energy stocks.

However, oil prices have also come off their 2022 lows and traders see them facing resistance at the $110 per barrel price level. Could this mean that energy stocks are headed for a correction?

At one point it seemed that oil prices are headed towards their all-time highs. However, they have since retreated. Notably, crude oil prices are still much below their 2008 all-time high prices. Many fund managers have been bullish on energy stocks. Berkshire Hathaway chairman and legendary value investor Warren Buffett has invested billions of dollars into energy companies even as he has exited several defensive pharma stocks.

Occidental Petroleum and Chevron are among Berkshire Hathaway’s top 10 holdings now. Stanley Druckenmiller has also increased his stake in energy companies including Canadian miner Teck Resources which has interests in Canadian oil sand projects.

Crude Oil Facing Resistance at $110 Per Barrel Price Levels

Looking at the technicals, oil prices are facing resistance at the $110 per barrel price level. However, some of the fundamental factors are also impacting oil prices. Firstly, lockdowns in China, which is the world’s largest crude oil importer, have still not been fully lifted. Also, high gasoline prices are also leading to demand destruction in some other countries.

On the supply side also, countries like China and India have scaled up their purchases of Russian crude oil. This has helped alleviate pressure on the global crude oil supply chain. However, over the medium term, Europe, which is the biggest buyer of Russian oil and natural gas, plans to wean away from Russian energy.

According to International Energy Agency, last year Russia was the third-largest crude oil producer and second-largest exporter. It would not be easy to shun Russian energy supplies in a hurry, especially at a time when other major producers like Iran and Venezuela also face sanctions.

Goldman Sachs Likes Some Energy Stocks

Last month, Goldman Sachs said that it expects energy stocks to continue to outperform in 2022. It, however, predicted a market dispersion and gave its list of oil stocks it believes can outperform. These are ConocoPhillips (NYSE: COP), Phillips 66 (NYSE: PSX), and Halliburton (NYSE: HAL). Of these, the brokerage put Phillips 66 on its conviction list. Jim Cramer is also bullish on energy stocks even as he warned against buying the dip in some beaten-down tech stocks.

Meanwhile, recession fears have increased in the US. Former US Treasury Secretary Larry Summers has also joined the bandwagon and said that he sees a recession as a likely possibility. Most brokerages that are bullish on oil might not be pricing a recession in their price forecasts. Many economists are now predicting a recession in the U.S. which could lower the country’s energy demand as well as oil prices.

Thanks to the soaring energy prices, most oil and gas companies have lifted their dividends. However, unlike defensive companies, whose dividends are much more stable, energy companies’ payouts are dependent on the prevailing energy prices.

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