The year 2018 has been quite a turbulent one for the oil and gas sector. West Texas Intermediate (WTI) started the year just above $60 per barrel of oil and touched multi-year highs of more than $76 in early October. However, the rally was pretty short-lived. The commodity has plunged around 38% since then on fears of oversupply and economic headwinds.
Oil prices and stocks were already going through a rough patch, and the Federal Reserve added to the woes by raising the interest rates yet again yesterday for the fourth time in 2018. Markedly, all the three major stock indexes — the Dow, S&P 500 and Nasdaq Composite — suffered correction yesterday, having declined 2%, 1.6% and 2.4%, respectively. Post the hawkish stance by the Fed, WTI hit a fresh 15-month low of around $46 a barrel. In fact, Energy Select Sector SPDR (XLE) declined around 3% during the same time.
Crude in Bear Territory Amid Headwinds
Crude is reeling under the effects of supply glut along with fears of economic slowdown, which has been weakening commodity demand. Higher-than-expected output from Russia and record level of production from the prolific shale plays of the United States, even amid pipeline constraints, have been raising concerns. Markedly, the U.S. crude market has shifted from year-over-year storage deficit to a surplus. Current crude supplies, which stand at 441.5 million barrels, are up 1.1%from the year-ago figure and 7% from the five-year average.
Moreover, Fed rate hikes are likely to make borrowing costlier, impacting capital intensive sectors including energy and others, which will have to bear the rising cost of capital. This may rather slow down economic activities in general, undercutting oil demand further. Further, the dollar strength is playing a spoilsport by making the crude dearer for investors holding foreign currency.
Stocks Plunge to 52-Week Lows
As it is, the oil price rally in the first nine months of the year did not really filter down to the stock prices quite well. Further, with the plunge in the crude over the past few months, share prices of the energy stocks have been on the red territory. Making things worse, Fed’s decision of hiking rates and reducing outlook for 2019 took a beating on oil prices and spooked investors further, as is evident by the share prices of a host of leading energy companies that hit new 52-week lows yesterday.
Various other noted energy players like Apache Corporation (APA - Free Report
) , Schlumberger (SLB - Free Report
) , QEP Resources, Antero, Baker Hughes, Marathon Oil, Marathon Petroleum, Oceaneering International, Oasis Petroleum, Suncor, Phillips 66, Nabors, Canadian Natural, Core Labs, Encana, Helmerich & Payne, et al. touched 52-week lows yesterday.
Near-Term Uncertainty Over Oil Prices to Persist
Notably, the lingering trade conflict with China, an impending global economic slowdown and several geopolitical crises are likely to hinder growth of the U.S. economy. As it is, the Fed slashed its 2019 estimate for U.S. GDP growth to 2.3%, lower than its September projection of 2.5%. Weakening economic growth is likely to impact oil prices and demand. In fact, global oil demand is already showing signs of slowdown, especially in China and India. Moreover, the waivers on Iran oil sanctions are likely to continue till April, raising supply glut concerns. Further, the oversupplied oil market is not likely to wane anytime soon amid the softening demand, which is further expected to dent investors’ sentiment. Hence, an immediate crude price rise may not be round the corner.
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