By Avi Salzman

Energy stocks were having a great run before President Donald Trump's "Liberation Day" tariffs. The sector, up about 9% in the first quarter, has since gone from a haven against market tumult to the eye of the storm, and it doesn't look like things will get better soon.

Oil plunged to its lowest level in nearly four years on Friday, part of a two-day selloff that took prices down almost $10 per barrel. The plunge wiped out the year's gains in energy as the sector tanked more than 15% on Thursday and Friday, making it the worst performer in the S&P 500 index.

Is there any place to hide? Not really, if Trump doesn't back off. But natural-gas stocks may fare relatively well since their prospects shouldn't be hurt as much by tariffs.

Oil's plunge was surprising, given that oil and gas products were exempted from Trump's tariffs. But the industry looks vulnerable, largely because tariffs could trigger an economic slowdown or global recession.

Any drop in demand will force a reckoning in the industry. Either operators will have to slow production, or prices will keep falling. On Friday, West Texas Intermediate crude, the U.S. benchmark, was down 7.3% to $62.05 per barrel.

The other problem is a budding glut, with OPEC and its allies ramping up production just as demand looks set to stagnate. On Thursday, the group announced an unexpectedly big increase in output scheduled for May, planning to bring back production of 411,000 barrels of oil a day.

Analysts say that OPEC players are back to fighting for market share. There's also an internecine battle: Big OPEC players like Saudi Arabia are tired of holding back production when they say countries like Kazakhstan are overproducing, according to RBC Capital Markets analyst Helima Croft.

If OPEC's priorities have changed, it would be bad news for U.S. oil producers. "We suspect there will be some concern in the boardrooms of U.S. producers, as they have to potentially reset expectations about the OPEC leadership's willingness to provide perpetual price support," Croft wrote.

OPEC's production increase will almost certainly push an oversupplied market over the brink. All told, the market could be oversupplied by 1.3 million barrels of oil a day this year, J.P. Morgan estimates. That is more than 1% of total demand.

"While it is currently difficult to predict the overall direction of developments, we believe that, for oil prices, the trajectory is unmistakably one-way," wrote Natasha Kaneva, head of global commodity strategy at J.P. Morgan. Although she's waiting for things to shake out before adjusting her price targets, she thinks $50 oil -- or lower -- isn't out of the question.

If oil prices were down only because of tariffs or economic anxieties, this would look like a buying opportunity. Oil demand isn't going away, and most of the companies are carrying manageable amounts of debt.

But OPEC's newfound aggressiveness is a troubling sign. OPEC market-share wars tend to play out poorly for shale drillers, because it operates on a longer time horizon. OPEC's production increases in 2014 led to a bear market in oil that lasted well over a year. A similar market share battle in 2020 only reversed when Covid-19 briefly forced prices below $0.

Until oil companies cut production substantially, prices could keep falling. The problem is that companies might be reticent to cut back until prices drop below $60 and stay there for a bit.

"To be excited, you want oil to be $75 or $55 -- $65 is kind of no man's land," says Dan Pickering, chief investment officer of Pickering Energy Partners.

Some oil stocks look attractive after double-digit selloffs, he says. Companies like EOG Resources and ConocoPhillips have strong balance sheets and dividend yields over 3.5%. Those kinds of stocks ought to appeal to value investors at these levels.

Pickering argues that natural-gas stocks are in a better position. While they're vulnerable to an economic pullback, they don't face the OPEC risks and have other demand drivers, like growing exports of liquefied natural gas, or LNG. Natural gas can also benefit from a slowdown in oil drilling caused by low crude prices. Oil companies produce natural gas as a byproduct of drilling for oil; if they're forced to cut drilling, natural-gas supplies should fall, causing prices to rise. Natural-gas prices rose on Thursday and only fell modestly on Friday.

"I think that the gas story is better than the oil story by a pretty wide margin," Pickering said. "The stocks are more expensive, but they should be -- their story is getting better while the oil story is getting worse."

Pickering thinks leading producer EQT looks attractive. UBS analyst Josh Silverstein recommends Expand Energy, the rebranded Chesapeake Energy. It will be one of the biggest winners from the LNG boom, because much of its production comes from fields that are near Gulf export facilities. Coterra Energy, a smaller producer, is more of a value play, trading at just 8.3 times expected 2025 earnings.

Energy isn't a hedge anymore. That doesn't mean there aren't opportunities.

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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April 04, 2025 15:25 ET (19:25 GMT)

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