Good for ↑
Oil at $100 is pushing Treasury yields to multiyear highs and raising bets on Fed rate hikes. Investors are selling anything sensitive to rates, utilities included. But Exxon Mobil, Chevron and Halliburton generate surging cash at $100 oil, and their balance sheets improve as yields rise, unlike indebted growth companies.
Source: Bloomberg ↗
Investors are treating higher yields as a blow to every stock. But US crude at $100 is a cash windfall for big US oil producers and oilfield service companies. Drilling costs are mostly fixed, so each barrel above $70 is nearly pure profit. The oil surge scaring everyone else is what lifts their income. With modest debt, and cash going to buybacks and dividends instead of borrowing to grow, they are also less exposed to higher rates. The dollar usually strengthens when the Fed raises rates. This time the dollar index fell 0.7% in a week even as yields jumped. That suggests investors see a supply shock from geopolitics, not a demand boom. If that supply loss lasts, it would stretch out the windfall for Exxon Mobil (XOM), Chevron (CVX) and Halliburton (HAL).
Investors believe rising yields and expected Fed hikes are bad for all stocks. Traders are moving to safety and selling sectors sensitive to rates. They see energy as a short-term winner, but lump it with other inflation bets that get sold once the Fed acts firmly.
Why that may be wrong
Investors are spreading the pain of higher rates across every sector. They miss the companies whose business gets better from the same oil surge behind the rate fears. At $100 crude, energy producers generate cash that cuts their debt relative to earnings as it comes in. A rate hike hurts a real estate trust that must refinance its debt. It barely matters to an oil major paying down debt with an extra $30 margin on each barrel.
The link fails if oil drops sharply. One example would be US crude falling back below $85 within two weeks, on signs of weaker demand or a surprise OPEC output increase. Then the cash windfall fades and energy stocks would likely lag. A clear warning would be a weekly government (EIA) report showing oil stockpiles rising by more than 5 million barrels, together with OPEC announcing emergency output increases.
Oil at $100 can itself kill demand. If the Fed raises rates hard at its next meeting and signals more, US growth could slow sharply within 2-3 months. That would cut oil demand and reverse the price jump. Energy stocks would then face both falling oil prices and a recession. The weakest assumption is that the oil surge comes from lost supply and will last. If it is a speculative spike, with momentum funds piling in, it could reverse fast, before the cash windfall shows up. A single week in which US crude falls more than 8% while EIA stockpiles rise would show demand is already shrinking.
In March 2022, US crude crossed $100 during the Russia-Ukraine war. The energy sector fund was the best performer that year by far, while the utilities fund ended about flat and the consumer discretionary fund fell 37%. The rate hikes that came with the oil shock crushed assets sensitive to long-term rates, but energy producers kept building on their windfall. In 1979-1980, the big oil companies made record profits as Paul Volcker raised rates sharply. In supply-driven oil spikes, energy stocks tend to escape the pain of rate hikes. Their cash flow rises with the same inflation that causes the hikes.
US crude at $100 drives Treasury yields to multiyear highs, as traders bet on aggressive Fed rate hikes. Selling spreads across stocks, led by sectors sensitive to rates.
The oil surge behind the rate fears widens cash margins for big US oil producers and for oilfield service companies working in North American shale. Their sales move with the oil price itself. A weaker dollar despite rising yields points to a supply shock, not strong demand. If the supply loss lasts, oil prices stay high.
As the Fed raises rates into an oil supply shock, energy producers use their extra cash to buy back stock and pay down debt. Their credit gets stronger, the reverse of what happens in rate-sensitive sectors. Big oil companies and oilfield service firms with shale work become relative safe havens among stocks. They gain from the inflation shock and suffer less from the long-term rate risk weighing on the rest of the market. Investors are moving out of utilities, consumer discretionary and healthcare stocks while these companies keep generating cash.
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