What happened
The energy sector is rebounding today after a brutal start to the week. After going negative earlier on Monday, oil bounced back today as inventory data wasn't worse than the market feared. That helped spark some buying as investors went dumpster diving for beaten-down energy stocks.
That action sent shares of several companies surging. Leading the charge were Delek Logistics Partners (DKL -0.45%), Continental Resources (CLR), Kosmos Energy (KOS -3.13%), and Gulfport Energy (GPOR), which had all rallied more than 10% by 10:45 a.m. EDT on Wednesday.
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So what
Crude prices surged today as investors focused on some potentially positive developments. WTI, the U.S. oil benchmark, zoomed 19% to around $13.75 a barrel, while Brent, the global benchmark, surged 8% to roughly $21 a barrel. One factor fueling this uptick in oil prices was oil inventory levels in the U.S., which came in slightly below expectations. While the country added 15 million more barrels to storage this week, that was about 100,000 barrels below the consensus estimate and less than last week's 19.2 million barrel build.
One factor helping slow the supply glut is that companies such as Continental Resources have started shutting down wells. Continental is reducing its output by 30% in April and May due to the country's growing storage issues.
Another factor fueling crude prices is a report that OPEC might reduce its supply even further than its initial 9.7 million barrel a day reduction that starts next month. The group, along with its producing partners, could start cutting output immediately as well as potentially reduce it by a larger amount than planned to help ease the global glut. If OPEC takes additional action, it will provide further support for oil prices, which would benefit producers such as Continental and Kosmos Energy.
Meanwhile, gas-focused producers such as Gulfport Energy are also rallying today. It will benefit from higher oil prices since the natural gas liquids it produces derive their value from oil. On top of that, it's getting a boost from a 7% rally in gas prices. One factor that's fueling natural gas is that spending and production cuts by oil drillers such as Continental will help ease the glut of associated gas production that comes as these companies drill oil wells.
Finally, in somewhat unrelated news, Delek Logistics is skyrocketing -- its units are up more than 45% -- because it increased its distribution. The company gave its investors a 0.6% raise compared to the fourth-quarter rate and reiterated its plan to boost it by 5% overall this year. That caught the market off guard as it fully expected the company to reduce its payout due to all the turmoil in the oil market. Instead, investors could potentially earn a more than 25% yield if Delek Logistics delivers on its promise to keep growing its payout.
Now what
Investors see some potential bright spots in the energy sector as producers are reducing their outputs to combat the glut of oil and gas that's saturating the market. However, the industry remains in a tight spot due to persistently weak prices, which will likely force several companies to file for bankruptcy in the coming year.
Gulfport Energy, for example, is among the several companies that have hired advisors to help restructure its debt. Because of issues like that, investors should tread carefully with energy stocks since several could end up worthless if market conditions don't vastly improve in the coming weeks.
