What happened
Crude oil prices tumbled on Monday. Both WTI (the U.S. benchmark) and Brent (the global benchmark) fell about 4.5% by 10:45 a.m. EST to $51 and $55.75 a barrel, respectively. That slump in the oil market weighed heavily on energy stocks, especially shares of financially weaker companies. Leading the decliners were Valaris (VAL), Nabors Industries (NBR -0.49%), Kosmos Energy (KOS -0.99%), Oasis Petroleum (OAS), and Parsley Energy (PE). Each one slumped by around 10% at one point in the trading day.
So what
The number of coronavirus infections outside of China spiked over the weekend in places like Iran, Italy, South Korea, and Japan. That has increased the risks of it impacting global economic growth, which could dent demand for oil. That prospect for lower consumption added more weight to crude prices, which have already been under pressure due to an overabundance of supply.
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Today's slump in the price of crude put pressure on the stock prices of almost every company related to the sector. Kosmos Energy, Oasis Petroleum, and Parsley Energy all produce oil. Thus, today's sell-off will have a direct impact on their cash flows if oil remains at these lower levels. That would make it harder for each one to produce the money it needs to fund operations and maintain debt. Because of that, they might need to reduce their capital spending if crude prices continue to weaken, which would impact their growth prospects.
Valaris, meanwhile, operates offshore drilling rigs while Nabors operates onshore rigs and provides a variety of oil-field services to both sectors. While the sell-off in oil prices won't directly impact their cash flows, it could have an indirect effect. That's because oil companies might pull back spending on new projects, which would affect the rates they charge customers. Those lower prices would weigh on the cash flow those companies produce, making it harder for them to maintain their debt, which is a concern for Valaris after its debt spike last quarter.
Now what
The oil market is growing worried that the spreading coronavirus will start cutting into oil demand, potentially pushing crude prices even lower and negatively impacting the cash flows of producers and the companies that provide equipment and services to the sector. That will make it even tougher for the sector's financially weakest players to stay afloat, which is why so many are selling off today.
