Although the S&P 500 is trading at a record high energy stocks are not part of the rally. In fact energy stocks are heading lower as oil prices skid according to The Wall Street Journal.
U.S. stocks edged higher Monday, but energy shares dropped as the price of oil fell back toward $40 a barrel.
Energy stocks in the S&P 500 fell 2.7% and U.S. crude oil lost 3.3% to $40.25 a barrel. A glut of fuels and growing global production has weighed on crude prices recently.
How low will energy stocks go? So long as production remains high and demand off of its peak energy stocks will suffer. Many emerging markets are dependent on exports of crude oil and natural gas so they will continue to produce even at lower prices until the money runs out. This is a good fact to keep in mind when considering emerging market stocks. The second biggest user of energy in the world is China. Because China’s economy is slowing down so are its energy needs. How low energy stocks will go depends to a large degree on whether China can stabilize its economy or if it experiences a hard landing.
Chinese Expansion Turns to Contraction
The Economic Times reports that China manufacturing contracts as measured in July by the Chinese purchasing manager’s index (PMI).
The official PMI came in at 49.9 for July, down from 50.0 the month before and underlining problems in the world’s second-largest economy. A reading above 50 signals expanding activity, while anything below indicates shrinkage.
The National Bureau of Statistics attributed the slowdown to summer downpours, which hit the industry-heavy middle and lower reaches of the Yangtze River particularly hard. “Production and transportation of relevant areas were massively impacted,” said NBS analyst Zhao Qinghe, adding that slowing expansion and overcapacity also dragged.
Chinese officials may be blaming the shrinkage in manufacturing on the weather but this is an economy that grew by ten percent year after year and now is officially in the 6% range and probably closer to two or three percent according to analysts. How low will energy stocks go and for how long? Watch what happens in the land of managed capitalism. Meanwhile are the any ways to hedge your risks while investing in energy stocks and waiting for a rebound?
Safe Energy Stocks
CNBC says there are safe energy stocks even in today’s market.
The oil industry is no stranger to boom and bust cycles.
Crude has bounced back substantially since bottoming at $26.21 a barrel earlier this year. But with the commodity now hovering in bear market territory it seems oil’s run may be over.
Crude’s fluctuating price is weighing on some of the biggest energy names, with Exxon, Chevron, and Phillips 66 all posting disappointing earnings.
But that’s not stopping one analyst from staying overweight big oil.
Those who choose to invest now in big oil stocks like Chevron, Exxon Mobile or Royal Dutch will be taking advantage of low prices and high dividend yields. The CNBC analyst expects oil price to rise in late 2017. Meanwhile remember that while oil exploration has been hit badly as has crude production, refiners are still making money which is part of the rationale for keeping some big oil stocks in your portfolio.