Are Oil Stocks About to Crash?
About a month ago, PIF sold its exposure to Oil in its Dividend Portfolio.
Below is a summary of why we think Oil and Oil stocks may be in for a rude 2023.
Oil stocks had a great 2022 outperforming all other sectors and it’s not even close.
With a recession expected in 2023, the question that suggests itself is:
How do oil stocks perform in a recession?
The table below shows the performance of US oil stocks in 21st-century recessions and how long it took for those stocks to reclaim their pre-recession highs.
| RECESSION | FALL IN US OIL STOCKS | MONTHS TO RECOVER |
|---|---|---|
| Mar 01 – Nov 01 | -28% | 32 |
| Dec 07 – Jun 09 | -47% | 27 |
| Feb 20 – Apr 20 | -57% | 15 |
| AVERAGE | -44% | 25 |
So if a recession does indeed come to pass, and assuming history is any guide, pain awaits Oil stocks in the upcoming year.
Mind the Gap
The following chart is being shared across Wall Street trading desks.
It shows the gap between the WTI oil price (yellow line) and US energy stocks (blue line).
Oil is down substantially from its highs whereas US oil stocks are still at their highs.
Historically this gap is closed by oil stocks catching down to the oil price.
This suggests further downside risk to US oil stocks in the near term as many hedge funds are now trading this gap by shorting oil stocks.
Movers of Oil in 2023
Global recession: will there be one next year and if so how severe will it be?
China reopening: as the world’s second-largest oil consumer, whether or not China’s economy is humming along at full speed matters for the price of Oil.
Russia-Ukraine settlement: the conflict drove up oil prices this year and therefore it is reasonable to expect a ceasefire or negotiated settlement to have the opposite effect.
This list of movers is not exhaustive and it’s always possible that something completely unforeseen could impact the price of Oil in a major way. That said, our current assessment sees softness in Oil prices for at least the first half of 2023.