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Why Chevron, Devon Energy and Cheniere fell today

crude oil refinery

What happened

Big cap oil and natural gas Chevron (CLC -3.19%), devon energy (DVN -4.07%)Y cheniere (LNG -2.80%) they were all down on Friday, trading down 2.5%, 3.6% and 2.1%, respectively, at 2:54 p.m. ET.

Friday was Devon Energy’s ex-dividend date, and some traders often sell once they qualify for their quarterly payments. However, the selling across the sector pointed to broader factors affecting the entire oil and natural gas space.

And that

It appears that a combination of factors is contributing to Friday’s declines for these stocks, all of which were big winners overall in 2022. Among those factors were recession fears, recent declines in oil prices, concerns about the blockades in China and the relatively benign implementation of a cap on the price of Russian crude.

It is noteworthy that on December 5, several sanctions against Russian oil came into force. Some energy traders may have been preparing for a rise in oil prices when those new rules went into effect. The sanctions include a ban on the importation of crude oil transported by sea from Russia to Europe, as well as the implementation of a $60 price cap on Russian oil for G7 countries. Some might have expected that they would cause a disruption in oil markets and therefore a rise in prices.

However, while Russia vaguely threatened to cut output in response, the effect of the sanctions on the global energy market appears to have been more muted. As such, some traders may have abandoned their oil and natural gas bets on Friday. Of course, we are still in the early days of this sanctions regime, and it is not clear how the new rules will affect prices in the long run.

Another likely factor weighing on oil and gas stocks is fears of a possible global recession next year, which would reduce demand for energy. Lockdowns in various parts of China have already affected oil demand this fall. Although the Chinese government has begun to relax its zero-COVID policies, it is still highly uncertain how much and how quickly the country will actually reopen, especially if COVID-19 cases spike there this winter.

Also, on Friday, the Bureau of Labor Statistics reported that the US Producer Price Index rose 7.4% year-over-year in November, slightly more than the 7.2% economists had forecast.

While that inflation gauge was below its 8% level in October, the higher-than-expected number could encourage the Federal Open Market Committee to extend its policy of raising interest rates, despite widespread fears. that their efforts to fight inflation will tip the scales. US economy in recession. Not only that, but higher US interest rates tend to strengthen the dollar, and since oil and natural gas commodities are priced in dollars, a stronger dollar has the effect of lowering prices. of these raw materials.

Some traders may also be paying attention to a recent note from JPMorgan Chase analyst Marko Kolanovic, who made a short-term bearish call on oil on Thursday. His thesis was that while oil prices have collapsed in recent weeks, oil stocks have not fallen as much, so there could be a “catch-up” in the near term. However, Kolanovic remains bullish on oil long-term and believes any 20% to 30% retracement in oil stocks should be bought.

Now what

Just as oil and natural gas prices have been volatile to the upside over the past year, investors are seeing the downside of volatility in December. Oil prices have fallen back below where they were at the start of 2022. While natural gas prices, which are also relevant to Chevron, Devon and especially liquefied natural gas exporter Cheniere, remain higher than expected than they were then, natural gas prices are still well below their highs and have fallen sharply in the past two weeks.

Given that oil and natural gas remain important to the global economy, it is probably a good idea for a diversified portfolio to include some exposure to the best quality companies in this sector. However, as we’re now seeing, this commodity sector can be very volatile, so it’s probably best to keep your allocation to such stocks close to a fixed percentage that suits your comfort level, and cut or raise your bets. from time to time as the allocation grows. or is reduced outside of its target range.