ASX energy stocks under pressure as oil hits 4-week low amid growing recession fears

Mon 20 Jun 22, 11:53am (AEST)
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Key Points

  • Oil stocks are under pressure as oil dips -6% to US$110 a barrel
  • A 'soft landing' does not seem possible amid even more aggressive central bank tightening
  • Oil inventories remain tight, but will demand also play along?

The S&P/ASX 200 Energy Index has fallen an outsized -3.9% around noon after a sharp pullback for oil prices.

Crude oil dipped -6% to US$110 a barrel after hours last Friday, deepening the pullback for oil stocks including:

Woodside, Santos and Beach Energy price charts
Woodside, Santos and Beach Energy price charts (Source: TradingView)

Even oil cannot escape the selling

Oil prices staged a sharp 1-day selloff amid growing recession and demand destruction fears.

The Fed, European Central Bank, Bank of England and Reserve Bank are all expected to continue tightening financial conditions through to year-end.

Investors are bracing for everything but a 'soft landing' amid declining consumer confidence, weakness in manufacturing and service sector activity and rising credit risks.

"The oil market looks like it won’t be tight for much longer as demand destruction calls grow as aggressive central bank tightening will lead to a short-term economic downturn,' said Oanda senior market analyst, Ed Moya.

"It also seems like the supply outlook for crude could see some short-term relief as US production grinds higher and over expectations that OPEC+ will follow through on their modest oil output hike pledge."

Demand destruction takes on tight supply

Oil headlines have taken a sudden bearish U-turn as recession fears grow.

The reality is that global oil inventories remain at historically low levels.

EIA total liquids stockpiles
Source: EIA, HFI Research

"We continue to see an oil market in deficit, but with demand still not recovering fully, the bull picture is tainted," said HFI Research.

"By Mid-June, we need to see an uptick in the core 3 (gasoline, distillate, and jet fuel), if not, then oil demand destruction from higher oil prices is real and it will limit the upside of oil prices."

Another closer at the Energy Index

The S&P/ASX 200 Energy Index is still up 24% year-to-date despite selling off more than -13% in the past two weeks.

From a technical perspective, the XEJ is threatening to break below a 4-month consolidation area. For the trend to remain intact, it needs to bounce around these levels.

XEJ 2022-06-20 11-28-51
S&P/ASX 200 Energy Index chart (Source: TradingView)


Written By

Kerry Sun

Finance Writer & Social Media

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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