Please ensure Javascript is enabled for purposes of website accessibility

Oil Prices Jump, Igniting a Short-Covering Rally (SM, DNR, CRC, CIE, OAS)

By Matthew DiLallo – Jul 12, 2016 at 3:52PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Oil closes up more than 4.5%, driving SM Energy, Denbury Resources, California Resources, Cobalt International Energy, and Oasis Petroleum up double-digits today.

Image source: Getty Images.

What: After hitting a two-month low yesterday, oil prices rebounded today, closing up more than 4.5%. That rally sent oil stocks surging, with heavily shorted producers SM Energy (SM -0.09%), Denbury Resources (DNR), California Resources (CRC), Cobalt International Energy (NYSE: CIE), and Oasis Petroleum (OAS) all up double-digits today:

SM Price Chart

SM Price data by YCharts.

So what: A bullish report from OPEC was the primary driver of today's rally in the oil market. This was after the cartel forecast that non-OPEC supplies will fall by 880,000 barrels a day this year, which is 140,000 barrels per day deeper than its prior assessment. Further, it is projecting another 110,000-barrel decline in production next year, even as it expects oil demand to grow by 1.2 million barrels.

In addition to the bullish OPEC report, oil market traders believe tomorrow's U.S. inventory data will show a continued decline in crude supplies. That said, while the recent reports have shown stockpiles falling from their record highs of earlier this year, it also demonstrated a concerning trend in gasoline supplies. These conflicting trends suggest the country is still having trouble working off its oil glut.

That said, at least for today, the oil market is bullish, which is fueling big rallies in mid-sized oil stocks. Most of this is likely short-covering given that traders are betting heavily against all five of today's big movers:

Oil Stock

Short % of Float

Shares Short

California Resources

22.08%

6.9 million

Cobalt International Energy

14.21%

36.9 million

Denbury Resources

20.07%

60.7 million

Oasis Petroleum

17.98%

28.1 million

SM Energy

22.07%

12.9 million

Data source: Yahoo! Finance.

This high short interest tends to lead to short covering rallies when prices rebound.

Now what: While OPEC's report is bullish, nothing fundamental has changed in the sector. That still hasn't stopped oil stocks with an elevated short interest from rallying sharply on today's bounce in crude. This move is just a continuation of the stomach-churning volatility that has been the norm in the sector for more than a year.

Matt DiLallo owns shares of Denbury Resources. The Motley Fool owns shares of Denbury Resources. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Denbury Resources Stock Quote
Denbury Resources
DNR
SM Energy Stock Quote
SM Energy
SM
$43.70 (-0.09%) $0.04
Oasis Petroleum Stock Quote
Oasis Petroleum
OAS
California Resources Stock Quote
California Resources
CRC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.