Oil Stocks Have Been Hot Since Trump's Election. The Good Times Could End Soon. -- Barrons.com

By Avi Salzman

Oil prices and oil stocks have moved in opposite directions since Donald Trump was elected president. Something's gotta give.

Trump's win hasn't provided a boost for oil prices, with West Texas Intermediate oil crude down 5.3% since Election Day. Oil stocks, however, have shot higher, with the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund (ticker: XOP), which holds oil and gas producers, up 6.1%, almost twice as much as the S&P 500 index. Some smaller producers have risen more, with Dallas-based producer Matador Resources up 10%.

Oil stock strength makes a certain kind of sense. Trump should be good for the oil business in general, because he'll remove regulations that might otherwise slow drilling down or raise costs.

But the net effect of his policies is more likely to be bearish, analysts say. His "drill baby drill" ideology could lead to overproduction at a time when the oil market already looks like it's on the brink of a significant oversupply. Citigroup, for one, thinks international oil prices could slip from around $70 a barrel now to an average of $60 next year.

That's a bad setup for oil stocks, which are unlikely to keep rising when the commodity declines. "I'm not really sure this is going to be sustainable," said Roth MKM analyst Leo Mariani. "At some point, the bloom comes off the rose."

There doesn't seem to be much good news in the pipeline. OPEC, for instance, reduced its expectations for 2025 demand growth this week because consumption in China has been slowing. The world's second-largest economy has dependably sopped up the extra supply of crude in the past, but as China's growth rate slows and its citizens switch to electric vehicles, that is no longer the case.

With EVs accounting for at least half of car sales in China, the country's gasoline and diesel use may have already peaked, according to Jim Burkhard, who covers oil markets for S&P Global Commodity Insights. "That's a milestone in the market," he said. "China had such strong growth, and then it just stops."

Oil producers have been talking about slowing their production growth next year, or even holding production flat as the macro outlook darkens.

"We have a similar cautious view on commodity prices going into 2025," Brendan McCracken, CEO of Denver-based producer Ovintiv, said in an interview. "So what we've said is we expect to prosecute our business at a maintenance level."

Roth MKM's Mariani doesn't see many attractive oil stocks heading into this potential downturn. He's more optimistic about natural gas, which has risen since the election on expectations that Trump will overturn President Joe Biden's pause on approval of new natural-gas export facilities and ease rules for building new natural-gas power plants. Those regulatory changes could jump-start demand for gas.

Mariani's favorite natural-gas producers include Antero Resources and Coterra, which trade for 13.6 and 9.2 times next year's expected earnings, respectively.

Write to Avi Salzman at avi.salzman@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 15, 2024 10:19 ET (15:19 GMT)

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