Why oil stocks plunged on Friday

What happened

Oil stocks plunged this morning, and there was much more to the oil and gas sector than Friday’s market sell-off. Here’s how some of the biggest oil stocks fell to their lowest point during the day:

While most of these stocks gained ground over the course of the day, each still ended the shortened trading day in the red.

So what

News arrived from South Africa on Thursday of a new variant of the coronavirus which is believed to be highly infectious and has several mutations. This sparked fears around the world and forced the World Health Organization to designate the new variant, named Omicron, as a variant of concern. Some countries have already taken action: the UK, for example, was quick to ban flights from countries where the variant was found.

With Friday being the first trading day in the United States since news from South Africa was released, stocks in most sectors saw a massive sell off amid renewed fears of lockdowns that could jeopardize the economic recovery. Travel and cruise stocks, for example, were among the hardest hit on Friday, as the new variant has already triggered travel restrictions in some parts of the world.

Image source: Getty Images.

The transportation sector is also a heavy consumer of oil, so oil prices have fallen, as have oil inventories as bitter memories of 2020 resurfaced, when the U.S. benchmark West Texas Intermediate ( WTI) fell to a negative level at one point as demand for oil fell globally in the wake of pandemic-induced shutdowns.

As of this writing, WTI and Brent crude prices had collapsed by more than 10% each on Friday, marking the largest single-day drop since April 2020.

Today’s collapse in oil prices comes at a time when oil industry players were already nervous after the U.S. government pledged to release millions of barrels of oil from strategic reserves earlier this year. week in a bid to bring prices down, with several countries including China, India, Japan, South Korea and the UK joining us.

Oil stocks could not be spared after the fall in crude prices. Thus, whether they are oil producers or mid-market companies, the shares of companies in the oil and gas sector have fallen. Oil exploration and production companies have been hit the hardest, as is usually the case. Upstream oil companies are the most vulnerable to fluctuations in crude prices as they directly affect their cash flow and capital spending plans.

It has been a banner year for investors in oil stocks. Companies have seen their cash flow explode as oil prices rise, and many have decided to return larger sums of money to shareholders in the form of big dividends. Marathon Oil, for example, increased its dividend for the third consecutive quarter in October, representing a cumulative dividend increase of 10% since late 2020.

Investors fear the new variant of the coronavirus – and any resulting drop in demand and the price of oil – could put an end to these days of large returns, especially for stocks that have tied their dividends to cash flow. .

DVN Graphic

DVN data by YCharts.

Devon Energy, for example, introduced a new, more variable fixed dividend policy earlier this year, under which it pays a fixed dividend of $ 0.11 per share and a variable dividend of up to 50% of its cash flow. additional (i.e. 50% of the cash flow remaining after capital expenses, fixed dividends and one-time expenses, if applicable). Rising oil prices and increased cash flow from Devon helped it increase its total dividend by 71% sequentially. Its new dividend policy, which remains attractive, also explains why Devon Energy has turned out to be one of the best performing oil stocks this year.

Now what

Friday’s oil inventory sell-off was not unwarranted, but no one saw the instinctive movement in oil prices coming. While it is too early to say what the implications of the new variant of the coronavirus might be for oil demand and economic growth as a whole, oil prices could continue to be volatile for one important reason: the next policy. OPEC will meet on December 2. All eyes will now be on this event to see if oil producers will stick to their current production plan to gradually increase oil supply each month, even after the oil price rout. OPEC’s decision typically affects oil prices, and therefore oil inventories, so stay tuned.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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Steve R. Hansen