Brutally high oil and gas prices were the talk of the town in 2022 and one of the largest contributing factors to sky-high inflation. The thing is: When you reach the top, there's nowhere to go but down. And that's exactly where oil is going.
The price of crude has taken a drastic plunge amid worries about slowing demand for fuel and the prospect of further tightening by the Federal Reserve leading to recession. But at the same time, shares of energy companies have continued to climb.
The S&P 500 is down more than 17% this year while shares of Exxon, Halliburton and Chevron are all up more than 45%.
Oil prices and energy stocks are closely interlinked — so this discrepancy is an odd one and could mean that lower gas prices may not be here to stay.
What's happening: The price of West Texas Intermediate crude oil, the US benchmark, which is a large driver of gas prices, has fallen to its lowest level of the year this week— under $72 a barrel. It was trading above $120 a barrel in the summer.
The average price for gas was $3.33 a gallon on Thursday, down from its mid-June peak of more than $5 per gallon, according to AAA. That's just under what it cost a year ago, when the national average was $3.34.
But even though gas prices are falling, they're still higher than they have been over the past few years. That's contributed to record-breaking profits at major energy companies like Chevron and Exxon. The net income of global oil and gas producers is expected to double in 2022 to a record $4 trillion, according to the International Energy Agency.
In the third quarter, 81% of all energy companies in the S&P 500 reported earnings above estimates, the highest of any sector, according to Factset data. The energy sector reported the highest year-over-year earnings growth of all 11 sectors, at 137.3%.
While crude prices are dropping, equities traders appear to be taking on a different bet: They're hoping that OPEC's recent decision to stick with supply cuts and Europe's agreement to cap the price of Russian oil at $60 a barrel will keep the global supply of oil very tight, even if demand drops.
And demand may not drop. Recession isn't a given just yet, and the reopening of China from restrictive Covid-zero shutdowns could increase demand for fuel.
Exxon and Chevron are also speculating that crude prices will remain elevated and that demand will grow.
Exxon announced Thursday that it will lift capital spending next year by 10% to between $23 billion and $25 billion, with the goal of raising oil and gas production to a record 4.2 million barrels of oil equivalent per day by the end of 2027. Chevron said Wednesday that it expects to spend $14 billion in 2023, adding $2 billion, or 14%, to this year's budget.
What's next: In the end, the divergence may be temporary: In four of the five major splits between oil and energy stock prices since 1990, oil returned to a rally in the year that followed, according to Bespoke Investment Group.
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