Editor's note: Oil prices and oil and gas stocks experienced a sharp correction last week, and oil prices plunged lower again during the day. In the current environment, can oil stocks still be invested? Author: Simon On Monday, June 20, the domestic futures market encountered a

Editor's note: Oil prices and oil and gas stocks experienced a sharp correction last week, with oil prices diving lower again during the day. In the current environment, can oil stocks still be invested?

Author: Simon

On Monday, June 20, the domestic futures market encountered a real "Black Monday": black commodity futures plummeted across the board. Among them, iron ore fell by the limit , coke fell by more than 11%, and crude oil fell by more than 5%.

In addition to the impact of domestic policy news, the sharp drop in international crude oil prices last Friday (June 17) may also be one of the reasons. On that day, the price of WTI crude oil plunged sharply lower, once falling nearly 7% during the session, setting a new low in the past month.

Under the combined influence of multiple factors, oil prices have increased significantly since 2020, which has also driven oil and gas stocks to become the winners of the stock market in the past two years. Especially this year, the trend of oil and gas stocks has even accelerated its upward trend. Stock god Buffett was crazy about buying from March to May this year

Source: Whale Wisdom

But since last week, oil and gas stocks have begun to experience a sharp retracement.

Buffett bought

Source: Finance M Square

Of course, the negative value here does not refer to the spot price circulating in the market, but the futures price. In other words, under the current circumstances, the seller of crude oil was afraid that the goods would be smashed into his own hands and could not be sold, so he would rather pay for it and find a buyer to take over to avoid causing greater losses in the future. It can be seen how depressed the market sentiment was at that time.

The main reason for the downturn comes from supply and demand concerns. On the one hand, oil producers at the time were unwilling to temporarily suspend production to save relatively low oil prices; on the other hand, the initial outbreak of the oil epidemic forced a sharp drop in demand around the world and intensified the imbalance between supply and demand.

However, this situation did not last long. When market panic was fully released, the world began to adopt extremely loose policies in response to the impact of the epidemic. Taking Federal Reserve as an example, the super combination of Federal Reserve interest rate cuts + unlimited QE has greatly boosted market demand. With the resumption of work and production and household consumption returning to normal after the epidemic, the demand side of oil prices has recovered strongly.

On the other hand, due to the Federal Reserve's ultra-loose policy, the U.S. dollar index began to fall sharply, and the price of crude oil priced in U.S. dollars rose accordingly.

U.S. Dollar Index and Oil Price Trends Source: Yingwei Finance

This year, oil prices fell back for a time, but the armed conflict between Russia and Ukraine at the end of February added fuel to the fire. Since Russia is a major oil producer with a daily crude oil production of nearly 11 million barrels, the supply from Russia was significantly reduced after the conflict, allowing oil prices to continue to rise.

Rising oil prices have pushed up global inflation, and the U.S. CPI level has hit a new high in more than 40 years, forcing most central banks around the world, including the Federal Reserve, to start aggressive interest rate strategies.

2. Bearish sentiment has risen to 2008 highs, is oil price in danger?

Under the shadow of changes in macro policies and concerns about economic recession, bearish sentiment on crude oil prices has risen to a high level.

U.S. energy stocks ETF

Source: Internet

Coincidentally, in 2008, when the bearish sentiment was equally strong, the price of crude oil was also touching a stage high above US$140, and then fell sharply to below US$40 within half a year, a drop of more than 70%. After plunged nearly 10% last week, the price of WTI plunged again by nearly 6% as of press time, increasing the risk of further declines in the short term. However, it should be noted that the current oil price is still above the 200-day moving average, which is considered a trend watershed, and the long-term trend may still be supported.

Source: Huasheng Securities

CITIC Securities believes that with the successive implementation of tightening policies in major overseas economies around the world, global economic recession is expected to become stronger, commodity prices are expected to gradually fall. 2022 may be the year when commodities peak, but due to the unresolved conflict between Russia and Ukraine, the main export commodities of Russia and Ukraine, including crude oil, may have strong anti-fall properties.

At present, in order to reduce inflation in the United States, the Biden administration is looking for various ways to reduce oil prices. While the White House has released large amounts of oil from the U.S. Strategic Reserve, expanded the use of ethanol-blend gasoline, and considered establishing a gasoline tax holiday, these efforts have not significantly reduced oil prices.

Source: Internet

3. Can you continue to invest in oil and gas stocks?

From a short-term perspective, the trend of oil and gas stocks is obviously dragged down by the decline in crude oil prices, and may fall further in the short term. It is highly likely that Buffett will suffer losses in the short term.

However, based on the above analysis, oil prices are still extremely resilient in the long term, and the probability of a crash-like decline similar to that in 2008 is unlikely. But what still requires special vigilance is that the risk of recession in the global economy seems to be increasing.

However, with the current high oil price of over 100 US dollars, the "margin of safety" is still very high for oil companies. According to Occidental Petroleum document, company has 72% of operating oil wells with breakeven prices below US$40, which means that Occidental Petroleum is expected to maintain strong profit growth under the current oil price background.

Of course, in addition to the risk of economic recession, Iran 's possible return to the market will also have a negative impact on oil prices. According to news on the 20th, Iran’s Foreign Minister stated that a “good agreement” may be reached on the Iran nuclear agreement , and Iran’s sanctions may be lifted by then.

Obviously, the ongoing real demand in the current crude oil market is wrestling with the dilemma of high inflation, and oil prices may maintain a short-term balance near $100. In the future, once the economic recession leads to a sudden drop in demand or inflation is effectively controlled and the economy takes off again, crude oil will choose its direction again.

Therefore, in the short term, the bearish sentiment in oil and gas stocks needs to be vented, and further short-term declines are more likely. But in the long term, energy stocks remain high-quality value stocks.

Risk and Disclaimer Tip: The above content only represents the author's personal position and opinion, and does not represent any position of Huasheng. Huasheng cannot confirm the authenticity, accuracy and originality of the above content. Before making any investment decisions, investors should consider the risks of investment products based on their own circumstances. If necessary, please seek advice from a professional investment advisor. Huasheng does not provide any investment advice, nor does it make any commitments or guarantees.

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