What: Shares of both Seadrill (NYSE:SDRL) and Atwood Oceanics (NYSE:ATW) were moving higher on Monday, up 12% and 11%, respectively, by 3:30 p.m. ET. Fueling those rallies was the price of oil, with the global crude benchmark rising 1.5% to close at $50.39 per barrel, after peaking at its highest level since last November.
So what: Driving crude oil's rise were growing concerns about supply. This was after Nigeria's oil industry continues to be hit by militant attacks, which are cutting deeply into its output. In fact, that country's output is now down 500,000 barrels per day from its peak, with 170,000 barrels per day of output recently knocked offline due to attacks on its pipeline infrastructure. Moreover, militants have warned that they'll cut the country's output to zero, which would be a big blow to the oil market given that Nigeria had been Africa's largest oil producer. Nigeria's growing supply problem is coming at a time when crude supplies are still being affected by the wildfires in Canada as well as supply outages from Venezuela and Libya, in addition to declining output from U.S. shale wells.
With supply worries growing, there is the potential that oil could soon rise to a level that oil producers would find compelling enough to increase investments in offshore wells. It's this possibility -- that the offshore drilling industry could start to recover -- that's driving the rally in Seadrill and Atwood Oceanics. That's because both companies need higher oil prices so that they can keep their rigs working.
Now what: The oil market has quickly gone from vastly oversupplied to potentially undersupplied due to supply outages and declining legacy production. That bodes well for offshore drillers because rebalanced supplies and higher oil prices are what's needed to fuel a recovery in the sector, thus improving the operating conditions for both Seadrill and Atwood Oceanics.