Why Energy Stocks Dropped on Monday

What happened 

Oil stocks had a rough start to the week after WTI Crude oil prices fell 4.9% to $93.82 per barrel and Brent Crude fell 3.9% to $99.87 on Monday. That pulled the entire industry down. 

Shares of oil producer Centennial Resource Development (CDEV 3.77%) plunged as much as 5.6% today, offshore rig owner Transocean (RIG 1.72%) fell 7.7%, and Core Laboratories (CLB 0.30%) dropped 8.9%. The stocks closed the day down 1.8%, 4.7%, and 4.9% respectively. 

So what 

The biggest economic news out today was the Institute for Supply Management’s (ISM) reading of manufacturing sentiment. The ISM’s measure of manufacturing PMI was 52.8% in July 2022, indicating slow expansion in manufacturing. A reading above 50% implies growth while below 50% indicates contraction. What was concerning is that a new order reading was 48% in July, which could be bad for future growth. 

This was the worst manufacturing PMI reading since May 2020 when the COVID-19 pandemic was in its early stages. If manufacturing activity slows down, that’s not good for oil and gas demand, which is why prices are reacting today.

Prices of futures have been below the spot price — which is what the media usually reports — for months, so it’s not surprising to see prices fall. But the market may not have been anticipating this quick of a drop. 

Now what 

The supply of oil has been slowly but surely increasing because prices have been high enough for some drilling to be justified. That’s given not only oil producers hope, but also hope for service providers like Transocean and Core Labs, who only make money when oil producers need their services. 

As much as the market may react to a day’s trading like this, I think it’s more noise than investors should be thinking about long-term. Oil producers aren’t worried about the daily swings in oil,  and I think there’s been a structural change in how aggressive companies will be investing in new production. There’s been an uptick in drilling lately, but not enough to flood the market and hurt pricing like there was in 2014, which indicates that prices should remain relatively high. That should be good for oil company operations long-term. 

I wouldn’t read too much into a single day’s trading in oil markets. Prices can move up and down wildly, and today is just a down day. I still think producers are being more conservative and won’t flood the market, even if there’s a small slip in demand. For long-term investors, this looks like a buying opportunity. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends Core Laboratories and Transocean. The Motley Fool has a disclosure policy.

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