Why Oil Stocks Are Surging Today

What happened

The U.S. oil price benchmark, WTI, rallied nearly 4.5% today, closing above $58.50 a barrel. That rebound sent energy stocks soaring. Leading the way were Centennial Resource Development (NASDAQ: CDEV), California Resources (NYSE: CRC), Whiting Petroleum (NYSE: WLL), Transocean (NYSE: RIG), and Valaris (NYSE: VAL), which all rallied more than 10% on the day.

So what

Two factors fueled the rally in oil prices today. First, the U.S. Energy Information Administration published its weekly report on oil storage levels, which showed a decline of 4.9 million barrels. That was much higher than the 1.7-million-barrel drop that analysts expected and an improvement from the 1.6-million-barrel inventory build last week. The report suggests that demand came in above supplies, which would be a positive development for the currently oversupplied oil market.

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In addition, members of OPEC are meeting this week to discuss their current production levels. Some members want the group to cut output further to help reduce the oil market’s oversupply. If that were to happen, it could provide another boost since it would ease one of the main issues weighing on pricing.

The uptick in oil prices today, as well as the potential for them to go even higher, is driving up the stock prices of oil producers. Smaller producers like Centennial Resource Development, California Resources, and Whiting Petroleum are making the biggest moves because they’re among the greatest beneficiaries of higher prices. They would enjoy higher cash flow, which Centennial Resource Development, for example, could use to drill more wells. California Resources and Whiting Petroleum, meanwhile, could use the money to pay down more debt.

Offshore drilling stocks Transocean and Valaris are also benefiting from the rally in oil prices today. Higher oil prices will give the companies’ producing customers more confidence to invest in offshore drilling projects, which would enable Transocean and Valaris to put more of their rigs to work.

Valaris is getting an additional boost from the continued actions of an activist investor. Luminus Management, which holds an 18.7% stake in the company, sent a letter to investors saying that shares could be worth four times their current value if the company were “appropriately governed.” It’s calling on investors to seek “significant board changes” to help steer it in the right direction.

Now what

Oil prices have been all over the place this year as the market shifts between optimism and pessimism. Right now, it’s optimistic that OPEC will cut its output further, which would help ease concerns that there is too much supply, likely pushing prices higher. However, if it stands pat, then prices could give back today’s gains, and then some, which would likely cause these oil stocks to sell off. Investors should thus focus their attention on oil stocks that can thrive even if crude prices fall.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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