Crude Oil And Energy Stock Prices Have Drifted Apart. Big Oil Could Be Set To Fall.

Crude Oil And Energy Stock Prices Have Drifted Apart. Big Oil Could Be Set To Fall.
Paul Allison, CFA

about 1 year ago2 mins

The price of crude oil’s been on a white-knuckle ride over the past few years. In the midst of the Covid lockdowns, demand skidded to a virtual stop, leaving oil sloshing around in undocked tankers with the world totally out of storage. Back then, for a few fleeting moments, you could’ve been paid to take a barrel of oil and pop it in your garage. In the two years that followed, though, the benchmark Brent crude shot up in a straight line, reaching almost $130 a barrel after the war in Ukraine broke out. Today, it’s around $83 a barrel, about 15% above its 20-year average.

There’s a point here and it’s this: with commodities like oil, supply and demand act as natural stabilizers, and that’s worked just as well over the past two years as any other, despite the unprecedented challenges. For example, the embargo on Russian crude has been a headache for the global oil market. But while the West has turned to other sources, China and India have been snapping up cheap oil from Russia, and that means they haven’t been buying from elsewhere – say, from Saudi Arabia. That in turn means more Saudi oil is available for the West. This is how a global commodity market works.

So I’m eyeing the above chart nervously. The share prices of US energy firms and the price of crude oil have moved in lockstep over the past couple of years, but they’ve recently decoupled. Part of the reason for this is the enormous profit they reported for the third quarter, which investors cheered, but it seems logical that either the price of oil needs to catch up, or shares of US energy firms might be set to slide.

Now, no one knows what’ll happen next to the price of oil, but there’s a serious risk that it could continue to slide as economies in the West appear poised to slip into recession. But regardless of whether that happens, you’d be wise to view the all-time-high stock prices of energy firms producing record profits with a degree of caution. Their fortunes are tied to the price of oil, and whether high prices stick around or not is, frankly, anyone’s guess.

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