On Wednesday, West Texas Intermediate (WTI) crude oil fell below $76 a barrel, breaking through its 200-day moving average, which had served as a strong support level since mid-July. This decline was driven by concerns of a global demand slowdown outweighing supply worries.
Oil prices are currently on a downward trend, heading for their third consecutive week of losses and reaching levels similar to those observed in mid-July. Since reaching highs in September, crude oil prices have dropped by 20%, entering what’s often referred to as a bear market.
Chart: Oil Prices Break Below 200-Day Average, Eyes Bear-Market Zone
This drop in oil prices had a significant impact on energy-related stocks.
The Energy Select Sector SPDR Fund XLE experienced its fourth consecutive session of declines, reaching levels last seen on July 21. U.S. energy stocks, in general, declined by 10% over the past three weeks.
Both upstream companies, tracked by the SPDR Oil & Gas Exploration and Production ETF XOP, and downstream ones, monitored through the VanEck Oil Services ETF OIH, have faced declines of 10.5% and 12%, respectively, over the same period.
Why Are Oil Prices Falling?
Recent weeks have seen renewed concerns about a global decline in crude oil demand. Factors contributing to these concerns include disappointing Chinese economic data, signs of a weakening U.S. labor market in the previous month and the looming possibility of a recession in Europe.
The U.S. Energy Information Administration (EIA) revised its petroleum consumption forecast, now anticipating a decrease of 300,000 barrels per day for the year. This is a significant reversal from its previous projection, which anticipated an increase of 100,000 barrels per day.
On the supply side, worries about potential disruptions in the Middle East eased, as the conflict between Israel and Hamas appeared to be localized in the Gaza Strip, reducing fears of a broader regional conflict. In the U.S., crude oil inventories surged by almost 12 million barrels last week, marking the largest increase since early 2023.
Energy Stocks’ Performance
Examining the impact of the negative performance of the XLE ETF in the last month, Chevron Corporation CVX stands out as the dominant driver.
The second-largest U.S. oil company has witnessed a monthly decline of 12%, dragging down the overall sector by 2.2 percentage points.
Exxon Mobil Corp. XOM, the heavyweight in the XLE, fell by only 3%, contributing to a 0.7 percentage point decline in the sector for the month.
The third stock affecting the sector’s performance was Schlumberger N.V. SLB, which saw a decline of 4.8%, contributing 0.2 percentage points to the sector’s monthly decline.
10 U.S. Energy Stocks Trading At Single-Digit P/E Multiples
The recent decline in energy-related stocks has increased the appeal of traditional valuation metrics.
When we consider the forward price-to-earnings ratio, which reflects the ratio between the current share price and the 12-month forward expected earnings per share, we can observe that several large-cap U.S. energy stocks are now trading at levels below 10x.
- APA Corp APA: 5.9x
- Devon Energy Corp DVN: 6.6x
- Marathon Oil Corp MRO: 6.9x
- Valero Energy Corporation VLO: 7.7x
- Phillips 66 PSX: 8.3x
- Western Midstream Partners, LP WES: 8.4x
- Marathon Petroleum Corp MPC: 8.8x
- EOG Resources, Inc. EOG: 9.0x
- Chevron Corporation: 9.9x
- Energy Transger LP ET: 9.9x
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