Oil and energy prices are moving in opposite directions, what’s going on?

While the price of crude oil and energy stocks typically move up and down together on Wall Street, a ‘unique backdrop’ of economic pressures is pulling them apart in 2022.

Over the last three months, crude oil prices have fallen 6.13% while oil producers including Chevron, Hess, Diamondback, and ExxonMobil all hover firmly in positive territory. Year-to-date, the spikes in energy prices are even greater, with Hess skyrocketing 83% and Warren Buffett’s Occidental Petroleum ballooning 105%. 

As of Tuesday, NYMEX crude was up 5.54% for the month and 1.17% for the year. Brent crude is up 6.37% for the month and 2.84% year-to-date.

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In an interview with FOX Business, Adam Kobeissi, founder of the financial newsletter, The Kobeissi Letter, said "The divergence in the price of crude oil and U.S. producers is undoubtedly rare but is driven by a unique fundamental backdrop."

"After months of surging crude prices from the war between Russia and Ukraine and hopes of avoiding a global economic recession, oil markets have finally topped," he explained. "The recent drop in prices seems to be based on a stronger U.S. Dollar, COVID-19 lockdowns in China, and fears of a recession dampening demand."

Last week, the U.S. Federal Reserve remained committed to its interest rate hike strategy, moving the fed funds rate 50-basis points higher to cool inflationary pressures not seen in more than four decades. Many observers expect the Fed’s policy moves to send the U.S. economy into a recession. 

Should traders buy the rumor and sell the news?

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Adam Anderson, CEO at Innovex Downhole Solutions in Houston, Tex. told FOX Business on Wednesday, "Numerous refineries are coming online in 2023 and should lower the spread between crude and refined product, while buffering demand destruction due to high gasoline and diesel prices."

"It’s probably a buy the rumor sell the news kind of situation," he continued. "Energy equities are holding in the face of oil weakness because investors are pleasantly surprised by the earnings, cash flows, and capital discipline coming out of the sector."

"Despite trading at much lower multiples relative to the S&P, we’re starting to see capital discipline lead to better returns across the sector and room to rerate higher in 2023," Anderson added. 

Energy investors ‘don’t need $100-plus crude’ for better margins

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Kobeissi said the European Union’s imposed $60 per barrel cap on Russian crude and higher cost producers have already begun shutting down production, leaving U.S. companies to produce oil cheaply amid easing fears that lockdowns in China will limit demand and a depleted Russian output.

"On top of this, we’ve had some of the most compliant OPEC+ policy in decades as global supply tightens," he continued. "Therefore, investors are viewing American oil as an opportunity, and they don’t need $100-plus crude to maintain high margins."

"Supply is limited largely due to political factors, but there are still hopes of resilience in the longer-term demand curve," Kobeissi finished. 

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