Please ensure Javascript is enabled for purposes of website accessibility

Why Oil Stocks Are Bouncing Back Today

By Matthew DiLallo - Mar 31, 2020 at 1:38PM

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

Shale drillers in the U.S. are considering drastic actions to combat crashing crude prices.

What happened

The U.S. oil price benchmark WTI is bouncing back a bit today after crashing to an 18-year low of around $20 a barrel yesterday. That's helping fuel a rally in most energy stocks. Shares of several U.S. producers jumped more than 10% by noon EDT on Tuesday, including Devon Energy (DVN 1.71%)Parsley Energy (PE)Diamondback Energy (FANG 1.20%), and Apache (APA 1.65%).

So what

One reason WTI is higher today is that U.S. producers are contemplating a coordinated effort to reduce their output in the near term to help combat the demand destruction caused by the COVID-19 outbreak.

Two oil pumps with a bright sun in the background.

Image source: Getty Images.

Several producers have already announced budget cuts following the collapse of oil prices in recent weeks. Devon Energy, for example, sliced $500 million out of its budget a couple of weeks ago and then reduced it by another $300 million this week, slashing it by 45% overall. Diamondback also made two budget-reduction announcements, cutting its spending plan by 40% overall. Apache, meanwhile, made one deep 40% cut a few weeks back.

These budget reductions, however, won't have an immediate impact on output. That's because these companies are only slowing their activity levels, meaning they won't complete as many new wells as initially expected this year. That will have some effect on production in the future as the output from legacy wells declines and not enough new ones come online to replace that lost output.

Diamondback Energy, for example, said today that its spending cuts this year would cause its daily average oil production rate to be about 3.5% below where it exited 2019. However, slight declines like that won't solve the industry's most pressing near-term problem, which is lack of storage space due to the COVID-19 outbreak's impact on demand.

That's leading some producers to push for even deeper industrywide cuts. Parsley Energy and Pioneer Natural Resources (PXD -0.18%) are leading that charge by jointly sending a letter to Texas' oil regulator to push for an emergency meeting to consider curbing output in the state, according to a report by Bloomberg. They're seeking a 20% reduction in Texas' oil output to help ease the glut of crude that's piling up in storage terminals.

In addition to that push from within the industry to curb production, President Trump recently spoke with Russian President Putin about working together to stabilize the oil market. They agreed to have their energy ministers begin talks, which could result in a coordinated production cut by those countries.

U.S. oil producers desperately need higher oil prices to survive. While many companies have oil-hedging contracts in place at higher prices to lock in some of their cash flow, most will expire by the end of this year. If prices don't improve, they won't generate enough cash to operate, which could cause a wave of bankruptcies in the coming quarters. That's why the industry and governments are discussing whether they can work together to get through this period of low demand from the COVID-19 outbreak so that excess supplies don't overwhelm the system.

Now what

Oil stocks in the U.S. are bouncing back on the hope that the industry will go a step further and start cutting production. While there's growing calls within the sector to take this action, there's no guarantee that everyone will come together in a coordinated agreement. Because of that, it's too risky for investors to consider buying shares of oil producers right now since things could get much worse.

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.

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

Devon Energy Corporation Stock Quote
Devon Energy Corporation
DVN
$60.05 (1.71%) $1.01
Apache Corporation Stock Quote
Apache Corporation
APA
$33.22 (1.65%) $0.54
Pioneer Natural Resources Company Stock Quote
Pioneer Natural Resources Company
PXD
$217.80 (-0.18%) $0.39
Diamondback Energy, Inc. Stock Quote
Diamondback Energy, Inc.
FANG
$126.04 (1.20%) $1.50
Parsley Energy, Inc. Stock Quote
Parsley Energy, Inc.
PE

*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
373%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

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.