What occurred

Oil costs plummeted right this moment. West Texas Intermediate (WTI), the first U.S. oil worth benchmark, tumbled 9.2% to shut at $98.45 a barrel, its lowest worth since Could 11. In the meantime, the worldwide oil benchmark, Brent crude oil, slumped 9% to shut at $103.29 a barrel, its lowest level since Could 10. 

That plunge in oil costs sparked a sell-off amongst oil shares. Massive oil giants Chevron (CVX -2.86%) and ExxonMobil (XOM -3.28%) have been down about 5% at one level within the buying and selling day whereas main refiner Phillips 66 (PSX -5.03%) was down as a lot as 7.4% on the day. Here is a take a look at what’s inflicting the downdraft within the oil patch and what it means for these oil shares. 

So what

Oil costs plunged following the Independence Day vacation, fueled by rising considerations about demand and a surging U.S. greenback in comparison with different currencies. Worries are rising that the worldwide financial system may enter a recession, pushed by greater rates of interest to fight inflation. That will probably influence gasoline, diesel, and jet gas demand as customers pull again on discretionary spending, together with journey. In the meantime, a rising U.S. greenback is making shopping for oil in foreign currency costlier, which may weigh on demand. 

If crude costs proceed slumping, it may influence the long run money flows produced by oil firms like Chevron and Exxon. Nevertheless, most oil firms will probably report gushing income for the just lately accomplished second quarter, due to excessive oil costs within the interval. ExxonMobil already revealed that it expects its refining income to leap as a lot as $5.5 billion within the second quarter. As well as, the oil big sees earnings from its upstream oil and fuel manufacturing enterprise rising by as much as $3.Three billion. That has the corporate on tempo to supply as much as $19.5 billion of earnings within the interval. The corporate expects to return a rising portion of this windfall to shareholders by way of its share repurchase program, which it tripled to $30 billion earlier this yr. 

Chevron additionally seems poised to supply an earnings gusher within the second quarter. Whereas it does not have as giant a refining enterprise as Exxon, it is a main oil producer. Due to that, it would profit from rising crude costs within the second quarter. Chevron’s rising money movement is giving it more cash to return to shareholders — it elevated its dividend once more this yr and licensed a $10 billion repurchase program. It is also permitting Chevron to speed up its transfer into decrease carbon fuels. 

Lastly, these robust refining market circumstances ought to be a boon for Phillips 66, given its deal with refining. This yr’s enchancment within the refining market is enabling Phillips 66 to supply extra cash. That allowed Phillips 66 to extend its dividend, resume its share repurchase program, and repay $1.45 billion in debt. It additionally enabled the corporate to maneuver ahead with an $850 million venture to transform a California refinery to a renewable fuels facility. 

Now what

Oil costs have cooled off significantly in current weeks and at the moment are again under $100 a barrel within the U.S. Nevertheless, costs are nonetheless comparatively excessive for oil and refined merchandise. Due to that, oil firms will probably report gushing income for the second quarter. In the meantime, they might produce robust outcomes once more within the third quarter if oil costs stay elevated. Whereas considerations are rising {that a} recession may trigger oil costs to maintain falling, there are many upside catalysts, together with ongoing provide points as a result of Russia invaded Ukraine. Given these dueling dynamics, oil costs will probably proceed fluctuating wildly within the coming months, resulting in extra volatility in oil shares.