In April, shares of prominent large-cap oil and gas companies such as Chevron (CVX 1.61%), APA Corporation (APA 1.57%), and the renowned oilfield service provider Halliburton (HAL 3.29%) experienced substantial declines, with drops of 18.7%, 26.1%, and 21.9%, respectively, as reported by S&P Global Market Intelligence. The downturn highlights the volatile nature of the energy sector and its sensitivity to external economic factors.
Among these three stocks, only Halliburton disclosed its earnings during April. However, the earnings report’s significance diminished amidst the widespread declines in the sector, primarily triggered by the steepest monthly drop in oil prices since November 2021. Investors reacted to broader market trends rather than individual company performance, illustrating how interconnected the market can be, especially in the energy sector.
Understanding the Impact of “Liberation Day” on Oil Prices
In April, the prices of Brent and WTI oil plummeted by 15% and 18%, respectively, marking the steepest one-month decline in oil prices since November 2021, according to CNBC. This significant downturn explains why stocks of companies heavily reliant on oil prices, like the aforementioned firms, fell in unison. The correlation between oil prices and stock performance in this industry is a crucial aspect for investors to monitor.
The major catalyst for this sell-off was tied to the economic repercussions following “Liberation Day” on April 2, when President Trump announced unexpectedly high tariffs on numerous countries. These tariffs affected both allied nations and adversaries, including major trading partner China, stirring uncertainty in the market. The announcement sent shockwaves through investor sentiment, causing a rapid decline in both oil prices and related stocks.
In the aftermath of Liberation Day, the downward spiral of oil prices and energy stocks prompted investor fears of an impending recession or a stagflationary slowdown. Although oil itself was not directly targeted by the new tariffs, the anticipated economic slowdown could severely dampen overall demand for oil, leading to further price drops. The interconnectedness of global trade and energy consumption cannot be understated in such volatile economic climates.
Despite the severe drop in oil prices, stocks showed signs of recovery by the end of April, as the administration began to grant tariff exemptions and indicated forthcoming trade agreements, likely with allied nations. This shift in policy offered a glimmer of hope for investors, hinting at potential stabilization in the market.
However, the recovery in stock prices did not extend to oil prices for several critical reasons. Even though the administration expressed intentions to negotiate trade deals that might reduce tariffs, the complexities of negotiations with China are expected to be lengthy and challenging. If tariffs remain high on Chinese imports, it could significantly affect demand in China, which is the second-largest oil consumer globally, trailing only the U.S. Therefore, while some relief might come from agreements with allies, a prolonged trade conflict with China could overshadow any potential recovery in oil demand.
Additionally, reports emerging on April 30 indicated that Saudi Arabia was no longer willing to sustain high oil prices through production cuts. Instead, they might increase production starting in June to reclaim market share. This strategic shift could be interpreted as a move to pressure higher-cost producers to cut back on output, potentially stabilizing the market. Furthermore, the increase in production might also be seen as an attempt to maintain favorable relations with the U.S. administration by keeping oil prices in check, which complicates the dynamics of the global oil market.
As oil is a globally traded commodity, the anticipated increase in production from OPEC+ in June is likely a key factor preventing a rebound in oil prices, contrasting sharply with the recovery seen in stock prices. Ironically, even as the administration is perceived as pro-oil and gas, its policies may inadvertently be pushing for lower prices, which could negatively impact the financial health of oil-related stocks.
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Meanwhile, Halliburton’s stock experienced a decline following its earnings release in April. Although the company exceeded expectations for first-quarter revenue and met the anticipated figures for adjusted (non-GAAP) earnings per share, its revenue still saw a year-over-year decline of 6.6%. This indicates the challenges the company faces in a fluctuating market.
However, beyond the reported financial figures, the primary cause for Halliburton’s stock drop was likely the cautious outlook provided by management. CEO Jeff Miller highlighted that Halliburton’s upstream clients are reassessing their drilling strategies in light of the tariff announcements on April 2. This reevaluation increases the likelihood of further declines in demand in upcoming quarters. Management also projected a two- to three-cent impact stemming from ongoing trade tensions, which could affect both demand and supply due to rising costs of raw materials like steel and aluminum.
Forecasting Stability for the Oil and Gas Sector
If OPEC+ proceeds with plans to escalate production in June, as anticipated, it is likely that oil prices will remain depressed for an extended period. The full economic consequences of the tariffs announced on April 2 have yet to manifest within the U.S. economy. Although certain tariffs have been alleviated and some trade agreements might emerge, the prevailing uncertainty, particularly between the U.S. and China, is expected to dampen oil demand moving forward.
While large oil and gas companies may manage to sustain dividends at current price levels, they also serve as a hedge against geopolitical disruptions in oil supply, especially concerning nations like Iran. However, absent any significant geopolitical events, the likelihood remains that oil prices will continue to underperform throughout this year. While this scenario could be beneficial for an economy grappling with tariffs, it spells potential challenges for the financial performance of oil and gas stocks.
