The collapse in oil has weighed on energy stocks this week

The week’s biggest energy news was that Brent crude oil prices fell 7% to $71.32 a barrel, sending most energy stocks lower. The drop in prices was largely driven by the release of relatively weak US economic data. The ISM manufacturing reading was just 47.2%, indicating a decline in manufacturing orders. On Friday, we learned that just 142,000 jobs were added in the US in August, well below the 161,000 expected, and the revisions dropped another 86,000 jobs from estimates in previous months. Add it all up, and the result left investors feeling less optimistic about the outlook for oil demand.

Oil producers and suppliers felt the impact of the news more strongly. According to data provided by S&P Global Market Intelligence, transoceanic (RIG -1.20%) shares fell as much as 13.3% this week and ended the week down 12.7%, while Vital Energy (VTLE -7.10%) fell as much as 21.4% and closed Friday down 21.2%. One positive outlier was Sable Offshore (SHOCK 0.97%)which gained 29.5% this week.

The drop in oil will hit companies hard

The decline in the price of crude oil will not be felt equally in the energy industry. Smaller explorers like Vital and service companies like Transocean will see revenues dry up and their already negative free cash flows fall further if crude continues to decline. And the market’s expectation that demand will be weak is not good news either.

RIG Free Cash Flow Data by YCharts.

It is not clear when higher oil prices might come. The global economy appears to be slowing and unless OPEC+ decides to cut production, there may be no catalysts to boost prices in the near future.

A big break

There was a big catalyst for Sable Offshore this week when the company reached a settlement with California’s Santa Barbara County. The company’s offshore platforms have been shut down since an oil spill in 2015, and the county has blocked approval of safety valve installations for the field. But that ended when a federal court said the county had no jurisdiction over the pipeline.

Sable will install 16 relief valves and expects to begin production at the Santa Ynez facility in the fourth quarter. This will start generating revenue for the company, which has recently done nothing but burn cash.

The uncertain future of oil

It’s been a wild few years for the oil industry — going from negative prices in 2020 to over $120 a barrel in 2022. But now supply and demand appear to be more balanced, just as the economy begins to slow.

Brent Crude Oil Spot Price Data by YCharts.

Without higher prices, it will be hard for many of these companies to make money. Offshore drillers, in particular, are feeling the pinch in prices as demand for rigs falls and lower daily rates can put these companies under water.

I think the oil space will be difficult to invest in for the foreseeable future as demand could weaken in tandem with the economy. Even the Federal Reserve’s rate cut would take months to provide relief, and by then oil prices could be even lower. This week’s decline could be a sign of things to come.