Why U.S. Oil and Gas Stocks Plunged Today

The U.S. oil and gas sector took a significant hit today, with stocks of major companies like ConocoPhillips (COP) and ExxonMobil (XOM) tumbling in response to a perfect storm of market pressures. The primary culprits? President Trump's newly imposed tariffs on Canadian, Mexican, and Chinese goods, and OPEC+'s decision to ramp up oil production starting in April 2025. Let's break down the key factors driving this market turmoil.



Tariffs and Economic Uncertainty

President Trump's tariffs, which went into effect yesterday, have sent shockwaves through the market. A 25% tariff on Canadian and Mexican goods, along with a doubling of tariffs on Chinese imports to 20%, has raised concerns about accelerated U.S. inflation and slowed economic growth. This economic slowdown could lead to reduced industrial activity and transportation, both of which are major consumers of oil and gas. The tariffs are expected to take an even bigger toll on the Canadian and Mexican economies, potentially plunging two sizable oil markets into recession. This could further dampen global oil demand, as both Canada and Mexico are significant producers and consumers of oil.

OPEC+'s Production Hike

Adding fuel to the fire, OPEC+ announced on Monday that it would begin increasing oil production starting in April 2025. This decision comes at a time when oil futures have already slumped to near their lowest levels in years, with West Texas Intermediate (WTI) crude futures falling as much as 4% to trade at $65.22, near its lowest price since late 2021. The increase in production by OPEC+ will likely exacerbate this downward trend, as the market becomes more saturated with oil.

Impact on U.S. Oil and Gas Stocks

The performance of U.S. oil and gas stocks is likely to be negatively affected by these developments. Shares of U.S. oil companies, including ConocoPhillips (COP) and ExxonMobil (XOM), have already followed crude prices lower. With the expected increase in oil production from OPEC+, the downward pressure on oil prices is likely to continue, which could lead to further declines in the stock prices of U.S. oil and gas companies. This is because lower oil prices reduce the profitability of oil and gas companies, as they earn less revenue from selling their products.

Moreover, the decision by OPEC+ to increase production comes at a time when the U.S. oil and gas industry is already facing challenges. Lower oil prices and a focus on shareholder returns are leading U.S. oil companies to drill less, slowing production growth. Efficiency gains have partially offset the decline in drilling activity, but the overall trend is towards slower growth in oil production. This, combined with the expected increase in oil production from OPEC+, could lead to a further slowdown in the U.S. oil and gas industry, negatively impacting the performance of U.S. oil and gas stocks in the coming months.

Long-Term Implications

The long-term implications of these developments are multifaceted. Lower oil prices and a focus on shareholder returns are leading U.S. oil companies to drill less, slowing production growth. For instance, "Lower oil prices and a focus on shareholder returns are leading US oil companies to drill less, slowing production growth." This trend is evident in the decline in the number of oil rigs, which currently stands at 479—down by 66 compared to this time last year. Despite the decline in the number of oil rigs, U.S. oil production has grown compared to year-ago levels, mostly thanks to efficiency gains. However, this growth is expected to slow down in the coming years. Wood Mackenzie expects Lower 48 oil production to grow by just 270,000 bpd in 2024 and another 330,000 bpd in 2025, a significant decrease from the 900,000 bpd growth seen in 2023.

Natural gas production has also been affected by low prices earlier in 2024, leading to a year-over-year decline. Dry natural gas production was 101.7 billion cubic feet per day (bcf/d) in April 2024, down from 102.7 bcf/d in April 2023, the lowest for 16 months. Major natural gas producers curtailed some output in the spring in response to the price slump earlier this year, which saw prices tumble to a three-decade low. The EIA expects U.S. marketed natural gas production to drop by 1% this year, led by a 9% decline in the Haynesville region and 4% decline in the Appalachia region as some producers have limited development and production due to low natural gas prices.

In summary, the tariffs imposed by President Trump and OPEC+'s decision to increase oil production are likely to have a negative impact on oil and gas demand in the short term due to economic slowdown and inflation. In the long term, the oil and gas industry may see reduced drilling activity and slower production growth as companies focus on shareholder returns and efficiency gains. Investors in the U.S. oil and gas sector should brace for a bumpy ride ahead.