Recession Fears Halt The Rally In U.S. Oil Stocks

• For the last two years, the energy sector in the S&P 500 has outperformed the index as demand bounced back.
• In the first quarter of 2023, despite strong earnings from oil companies, the energy sector has fallen while the S&P 500 has risen.
• If fears of a recession are realized, lower demand and lower oil prices may endanger the dividends of oil companies and hurt stock prices.

Despite another strong set of quarterly profits reported over the past two weeks, the oil and gas sector has underperformed the broader market this year as commodity prices have dropped and fears of a recession have intensified.  

The energy sector in the S&P 500 outperformed the index in the previous two years as oil prices and demand rose in 2021 after the reopening of economies from the Covid lockdowns and after oil and gas prices surged in 2022 following the Russian invasion of Ukraine and the heightened concerns about energy security.

At the end of last year, for example, oil prices were trading at a similar level to where they began 2022, but the S&P 500 energy index remained some 50% higher year-on-year. For the second year in a row, energy stocks outperformed the broader U.S. market in 2022.

But this year, the S&P energy sector was down by 8.2% year to date to May 5, compared to a 7.7% rise in the S&P 500 Index.

Analysts see limited near-term upside for the oil and gas stocks, considering the lingering concerns about a looming recession, which could affect oil and gas companies’ ability to repeat the strong cash flows from the past several quarters.

A further slide in oil prices as a result of a possible recession “doesn’t engender a lot of confidence in the near-term future of cash flows,” Matt Portillo, head of research at advisory firm TPH&Co, told the Financial Times.

The variable dividends at some U.S. shale producers – introduced in 2021 to boost shareholder returns alongside regular dividends – could be endangered in case of a slowdown in demand and falling prices, according to other analysts.  

Despite the decline in oil and gas prices between January and March this year, all of Big Oil, including U.S. supermajors ExxonMobil and Chevron, reported first-quarter earnings beating analyst estimates, thanks to higher production, strong trading results, and still relatively high refining margins.  

By Tsvetana Paraskova for Oilprice.com

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