Down 13% in the past month and on pace for four consecutive weeks of decline, the price of crude oil is now in a bear market, further pressuring stocks of energy producers.
West Texas Intermediate (WTI) crude oil, the U.S. standard, is down a little more than 20% from a peak of more than $90 a barrel reached in September and officially in a bear market. Typically, bear markets are defined as a decline of 20% or more from recent highs. Now trading at around $75 per barrel, WTI crude oil has slumped since mid-October, raising questions about the direction of energy markets.
Defying Expectations
With war breaking out in the Middle East, many analysts had expected crude oil prices to continue rising in recent weeks, with some analysts forecasting $100 a barrel crude by year’s end. But that hasn’t happened. Instead, prices for crude have softened due to a number of factors. These include a rise in U.S. exports of crude oil following the outbreak of war between Israel and Hamas, which has contributed to supply exceeding demand. Another factor is economic weakness in China, which is one of the world’s biggest oil consumers.
News of the bear market in crude prices comes days ahead of the next meeting of the Organization of Petroleum Exporting Countries (OPEC+) and its allies. OPEC+ is expected to continue its curbs to oil output as it has in recent months, with Saudi Arabia and Russia in particular constraining their crude exports to help keep prices elevated. However, analysts say that the current output tightening by OPEC+ is not enough given the soft demand and oversupply currently in the market.
The Impact on Stocks
The bear market in crude oil prices is proving to be a double-edged sword for stocks. On one hand, declining oil prices are helping to ease inflation and reduce the chances of further interest rate hikes by the Federal Reserve. That in turn has stocks rallying, with the benchmark S&P 500 up by around 8% so far in November. Softening oil prices are also exerting downward pressure on bond yields, which is also giving equities a lift.
Still, weakening crude prices are pressuring the stocks of oil producers, with the S&P 500 Energy Index down more than 3% so far in November. Stocks of leading energy companies have been crushed over the past four weeks as crude prices have fallen into a bear market. Chevron (NYSE:CVX) stock is down 14% for the past one month while ExxonMobil (NYSE:XOM) and Occidental Petroleum (NYSE:OXY) are each down over 6%. It’s a sharp reversal for the stocks of oil companies, which produced record profits throughout 2022 as WTI prices spiked at $122 per barrel following Russia’s invasion of Ukraine.
What’s Next?
All eyes are turning to the OPEC+ meeting next week and what the organization will do to try and keep crude oil prices from falling further. The question is: Will any actions on the part of OPEC+ be enough to stop the current slide in crude prices?
There’s a lot of geopolitical uncertainty weighing on oil markets right now, with analysts trying to determine whether war in the Middle East will escalate further and whether China’s economic decline will worsen. For now, investors may want to hedge their bets and steer clear of energy stocks until they have greater clarity on the situation.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
