Energy Stocks Lead the Rout as Oil and Natural Gas Plunge; Exxon, Chevron in free fall

ENERGY STOCKS:

  • After strong gains on Friday, energy stocks plunge early in the week, leading Wall Street to sell off
  • Sharp drop in oil and natural gas prices is weighing on the sector, but risk aversion sentiment is exacerbating the decline
  • Despite Monday’s price action, energy stocks maintain a bullish outlook on solid earnings growth potential

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US stocks dropped Monday in the afternoon trade, extending the previous week’s sell-off amid widespread capitulation. The energy sector, however, led Wall Street’s fall amid weak oil and natural gas prices, with futures for the two commodities down 6% and 10% respectively at the time. to write these lines. In this context, Exxon Mobil (XOM) and Chevron (CLC) plunged nearly 7% in midday trading, their worst drop since June 2020.

Oil’s pullback appears to be a response to concerns about the demand outlook amid ongoing lockdowns in China due to the current wave of COVID-19, although risk aversion is clearly exacerbating the correction. Meanwhile, speculation that the European Union may temporarily delay the rollout of the latest round of punitive measures against Russia, which calls for a ban on oil imports from that country, is also weighing on crude. While the bloc is likely to move forward with a phased embargo in the coming weeks, negotiations have hit a snag, with several member states seeking exclusions and more time to secure alternative energy sources to vote in favor of the sanctions package.

Related: Energy stocks look attractive amid surging oil

Focusing on energy stocks, Monday’s move may also be tied to some profit taking, as the outlook for the sector did not change overnight. Despite today’s decline, the S&P 500 energy index is up about 40% year-to-date. Meanwhile, the S&P 500 is down more than 15% over the same period. Looking ahead, as sentiment stabilizes and selling pressure eases, the energy sector could lead the way higher and lead Wall Street, aided by strong fundamentals in an environment of high commodity prices. raw materials.

Although past performance is not indicative of future results, energy stocks have rallied with forcein the following days a sharp drop in 2022. To underscore this point, let’s look at XLE, an energy sector fund. In March and April, the index suffered two strong Specimens peak to trough, but the selloff was brief on each occasion and within weeks the fund had recouped all losses and was hitting new highsuh tops.

As investors begin to prioritize earnings growth and shareholder return as the macroeconomic outlook becomes more challenging for many companies, energy companies are well positioned to meet new challenges and meet investment criteria set by a growing number of portfolio managers. That said, energy stocks could resume their ascent once excessive pessimism begins to fade.

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—Written by Diego Colman, Market Strategist

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