Energy sector slumps 3% Monday on oil price drop — time to take profits?

The energy sector is up about 34% year to date and investors may now be taking their gains as oil prices start to pull back.

The energy sector is lagging the broader market Monday, as oil prices pull back and continue their downward trend from last week.
At the time of this writing, West Texas Intermediate (WTI) was down just under 7% to $101.77 a barrel, while Brent Crude was also down around 7% to $105.12 a barrel.
The energy sector is mostly oil and gas stocks, so declining oil prices are driving a selloff in the sector, which is down almost 3% Monday. Stocks are following. For example, Exxon Mobil (XOM) is down 4% and Chevron (CVX) is down 3%.
The energy sector was the best-performing sector in 2021 and has been leading the market so far in 2022, but investors who jumped in now need to ask if the bull run is coming to an end.

What happened?

The pullback in the energy sector comes after US Deputy Secretary of State Wendy Sherman said on Fox News Sunday that Russia was showing some signs it might be willing to have meaningful negotiations over Ukraine.
Russia’s invasion of Ukraine three weeks ago roiled energy markets globally.
On March 8, President Joe Biden announced a ban on Russian oil imports and Britain said it would phase them out by year end, sending WTI skyrocketing 35% to a high of $123.70 a barrel and Brent soaring 31% to a high of $127.98.
Russia is one of the world’s biggest oil suppliers, so this decision unsurprisingly disrupted the global energy market.
But oil prices began falling last week, as OPEC member the United Arab Emirates said it supported pumping more oil into the global market.
“We favor production increases and will be encouraging OPEC to consider higher production levels,” said Ambassador Yousuf Al Otaiba in a statement tweeted by the UAE Embassy in Washington.

Oil prices are showing signs of leveling out, but global production will need to replace the hole in the market caused by Russian oil bans and sanctions to keep prices from rising yet again.
The US imported roughly 255,500,000 million barrels of crude oil from Russia in 2021. That’s about 700,000 barrels per day. And while only about 1% of Russia’s total crude oil exports go to the US, the immediate ban, coupled with private oil companies cutting ties with Russia, affects the overall supply.
The UK’s phasing out of Russian oil imports by the end of 2022 will hopefully help give the market enough time to replace Russian imports.
European Union (EU) states have stopped short of an outright ban but have imposed sanctions against Russia’s major oil companies that freeze EU investments for new production and exploration projects. The EU got about 25% of its crude oil from Russia in 2020.

Now what?

Up until last week, the energy sector showed little sign of slowing down. But investors may now be wondering if the bull run is coming to an end.
The energy sector is up about 34% year to date, so investors may be taking their gains as oil prices start to pull back. If you’re invested in oil stocks, it’s something to consider.
See our guide to oil stocks here.
Charles Schwab gives the energy sector a Neutral rating, saying there’s too much uncertainty surrounding the events in Ukraine and how the high oil prices will weigh on the economy and demand for oil.
Investors should expect volatility to continue, and volatility can swing both ways.
At the time of publication, Matt Miczulski owned shares of XOM.

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