Why are ASX 200 energy shares getting smashed in May?
A person smashes a wall with a hammer, sending bricks flying.
S&P/ASX 200 Index (ASX: XJO) energy shares have had a tough start to the new month.
With about an hour left before the closing bell sounds the end of the second day of trade in May, the ASX 200 is down 0.7%.
As for the big energy stocks, here’s how they’ve performed over the two days since the end of April:
Here’s what’s dragging on the energy sector.
Why are ASX 200 energy shares getting walloped?
The big fall so far in May for these ASX 200 energy shares is being driven by a tumbling oil price.
Brent crude oil dipped to US$83.54 per barrel earlier today before edging back to US$83.90 per barrel at time of writing. That’s down from US$91.17 per barrel on 6 April.
It’s a similar story with West Texas Intermediate crude oil. WTI has fallen below US$80 and is trading for $79.98 per barrel.
The oil price, and by extension ASX 200 energy shares, came under renewed pressure overnight after the United States Energy Information Administration (EIA) reported that US crude stockpiles increased by 7.3 million barrels last week. This widely exceeded consensus expectations.
“Demand concerns came into the limelight for oil traders as EIA data showed a surge in crude stockpiles and Fed chair Powell hinted at the delay in starting the easing cycle,” Charu Chanana, head of FX strategy at Saxo Capital Markets said (quoted by Bloomberg).
Indeed, atop the unexpected increase in US stockpiles, the prospect of higher interest rates for longer in the world’s top economy and other developed nations could portend lower fuel demand than markets have previously been pricing in.
The most welcome easing of tensions in the Middle East recently has also seen traders pull back bets that a wider regional conflict could upend oil supplies.
As for the supply side, a Bloomberg survey revealed that some OPEC members are cheating on their production cut pledges. Both Iraq and the United Arab Emirates were reportedly producing “several hundred thousand barrels a day” more than they agreed to.
Now what?
As to what investors in ASX 200 energy shares can expect from the oil price next, Vandana Hari, founder of Vanda Insights said (quoted by Reuters):
As the impact of the US crude stock-build and the Fed signalling higher-for-longer rates is close to being fully baked in, attention will turn towards the outcome of the Gaza talks.
In potentially good news for ASX 200 energy shares, a number of analysts believe we’re pretty much at a bottom with today’s oil price.
That’s partly because the US federal government previously stated the nation would likely restock its massive strategic reserves if WTI falls below US$79 per barrel. The US drew down its oil stockpiles in 2022 to tamp down oil prices, after Brent crude soared to more than US$122 per barrel.
“The oil market was supported by speculation that if WTI falls below $79, the US will move to build up its strategic reserves,” said Hiroyuki Kikukawa, president of NS Trading.
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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.