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Oil stocks lead US market down. Have they peaked?

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Big names including Halliburton and ConocoPhillips dropped 8% this morning as declining demand pushes oil prices lower. After roughly a month of falling stock prices, is it time for investors to take profits?

Oil stocks dragged the US market down Tuesday morning as the year's second half got rolling with recession fears on center stage.

The three worst performers in the S&P 500 after midday were Halliburton (HAL), APA Corp. (APA) and ConocoPhillips (COP), all down more than 8%. Nine of the 10 biggest decliners in that index were oil-related.

Analysts pointed to a recent drop in oil prices and slightly lower gas prices at the pump as signs of flagging demand for oil as the US and global economies slow.

While that could spell relief for consumers, investors in what has been the market's leading sector in 2022 might need to rethink their strategies.

Still up for the year, but…

While oilfield names have been some of the market's best performers amid this year's downturn — Halliburton, for example, remains up 37.4% in 2022 — every energy sector name in the S&P 500 is down over the past month, according to Finviz data.

Oil prices soared as Covid restrictions faded and the war in Ukraine fed inflation and rising fuel prices, along with oil companies' bottom lines. But oil prices have slipped since a recent peak in early June, and related stocks have been in a skid.

Tuesday, the US benchmark for oil slid below US$100 for the first time since May, and the international benchmark fell close to US$100. A note to clients from Citi suggested the latter, Brent crude, could reach US$65 by year's end, CNBC reported.

But right now predictions for oil prices range widely. In a note to investors seen by Bloomberg last week, JPMorgan Chase outlined how oil could spike to US$380 a barrel because of Russian retaliation.

So are oil stocks buys or sells?

With all the uncertainty, investors likely need to do individual analyses to figure out which stocks look attractive. For example, 34 of 38 analysts following Halliburton rate it a buy or strong buy; ConocoPhillips gets those readings from 15 of 21 analysts, according to Yahoo Finance. But only seven of 29 give buy ratings to APA.

Those recommendations may also not yet price in the recent downturn in oil prices.

Uncertainty could drive prices higher with an eye to oil spiking again. There's speculation, for example, that ongoing talks to limit the price of Russian energy still sold to Europe could lead to retaliatory price hikes.

But with the US Federal Reserve committed to breaking inflation with economy-slowing interest rate hikes, and increased pressure from the Biden administration to lower fuel prices at the pump as oil prices dip, oil stocks may very well have peaked.

Oil stocks also haven't necessarily been a great long-term investment. Exxon Mobil (XOM), for example, recently hit a record, but it's the first new high since 2014.

If you're not a long-term oil stock investor and uncertainty makes you nervous, it might be time to take some profits.

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At the time of publication, Ron Prichard did not own any of the stocks mentioned in this article.

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