Energy stocks have gone along with oil prices on a wild ride this quarter.
Oil prices steadily rose through April and then sank as the trade war between the U.S. and China escalated and threatened global economic growth. More recently, rising tensions between the U.S. and Iran have pushed prices higher.
After hitting a high for the year of $66.30 a barrel in late April, oil dropped about 22% through early June as global demand weakened and investors grew increasingly worried about economic growth. Even with the geopolitical tensions of the past week, that gloomy backdrop remains in place.
The U.S.-China trade war is being felt in most regions. Global oil demand rose just 0.3% in the first quarter, the slowest growth since the fourth quarter of 2011, according to the International Energy Agency. And weak manufacturing numbers in several countries raised concerns about slower than expected economic growth, according to the U.S. Energy Department.
“Everywhere you look it’s a lot of weakness in the cyclical segments of the global economy,” said Francisco Blanch, head of global commodities and derivatives research at BofA Securities.
The slowdown in economic growth is crimping demand for oil at the same time that production remains high. The Energy Information Administration said onshore oil production is set to rise by about 70,000 barrels per day in July, driven by increases from the Permian Basin.
Incidents in the Middle East over the past week reversed some of the declines. Two tankers came under a suspected attack in the strategic Strait of Hormuz last week and Iran claimed to have shot down a U.S. drone over Iranian airspace Thursday. The price of a barrel of U.S. crude oil is up 11% since June 12.
With the swings, energy stocks within the S&P 500 have fallen 6.7% so far this current quarter as of Wednesday. Brent crude, the international oil benchmark, is down 6% and West Texas Intermediate, the U.S. benchmark, is down 7%.
Crude oil is still up 18.5% for the year and energy stocks still show a gain of 7.7% in 2019, compared with 16.7% for the S&P 500.
The economic slowdown is the key factor weighing down prices. But the industry is also contending with efforts worldwide to reduce gasoline consumption either through fuel efficiency or new technologies such as electric vehicles.
“We feel that the oil market is sending off some very strong signals that global oil demand is declining quicker than generally anticipated,” said oil trading advisory firm Ritterbusch and Associates.
Oilfield services companies including Halliburton and National Oilwell felt the brunt of the decline this quarter. Large oil companies, including Exxon, held up better but still lost ground.
The oil market could get some relief from several different areas, Blanch said. The Federal Reserve has indicated it’s open to cutting rates to protect the U.S. economy and the members of OPEC plus Russia could agree to extend an agreement to reduce supplies. Positive developments on trade disputes would be the most high profile boost.