What happened

Shale oil producer stocks were surging today, riding a 25% increase in West Texas Intermediate crude futures higher. In early trading, many shale-focused independent oil producer stocks were up more than 10%. Here are some of the more notable companies with shale or other unconventional oil production that moved up big in early trading: 

Shale Producer Price Change on 4/22/20 High Price on 4/22/20
WPX Energy, Inc. (WPX) 7.5% 13.8% 
Ovintiv, Inc. (OVV 0.68%) 8.7% 10.8%
Matador Resources Co. (MTDR 1.58%) 7.7%  13.4% 
Northern Oil and Gas, Inc. (NOG 0.03%) 1.5% 10.8%
Parsley Energy, Inc. (PE) 6.4% 10.7%
Antero Resources Corp. (AR 0.77%) 1% 13.4%
Diamondback Energy, Inc. (FANG 0.70%) 6.4% 10.4%

Data Source: Yahoo! Finance. Prices as of 1:16 p.m. EDT on April 22. 

However, nothing worse than the shocking reality of mathematics took the air out of the shale driller's exuberant rally. The U.S. Energy Information Administration (EIA) released its weekly petroleum data summary, and the numbers were a stark reminder that the U.S. oil industry is at risk of drowning in crude. 

So what

According to the EIA report, even with oil imports declining, the combination of cratering demand under the coronavirus lockdown and still-too-high production caused crude oil inventories to rise another 15 million barrels last week, almost 10% higher than the five-year average. 

Oil drilling rig.

Image source: Getty Images.

There was also more evidence that things could continue to deteriorate, as oil demand remains incredibly weakened. Oil refinery inputs only decreased modestly, by about 209,000 barrels per day, but total products supplied fell a massive 25%. Gasoline supplied fell 41% last week, jet fuel supplied fell 54%, and distillate fuel (mainly diesel) fell 10%. 

Now what

Crude oil prices continue to swing wildly. After the initial shock of the IEA report, West Texas crude futures are rallying again, up almost 28% at 1:15 p.m. EDT. Yet even with such a big move, the most important U.S. oil price benchmark is still below $15 per barrel. There isn't a company on the list above that can survive at $15 oil. 

Of course, crude futures don't tell the full story; oil producers don't sell all their oil based on daily spot prices for futures. They hedge much of their production using various types of financial instruments, and also sign long-term supply agreements directly with oil users like refineries. That's why many of the producers above are still in business; they're getting more -- much more -- than $15 per barrel for most of the oil they produce. 

But the stark reality behind cratering demand and falling prices paints a very bleak picture. Many producers are already running into trouble selling oil they don't already have under contract as storage facilities fill up, and pipeline operators have started requiring proof of a buyer before taking oil from a producer. Moreover, even those supply agreements with refiners aren't a sure deal as refiners cut back. They're running into the same storage problems for refined products as producers are for crude oil. 

Add it all up and this is not an oil rally to buy independent producers on. The subsector is a minefield right now, and the rest of 2020 is going to be a fight for survival. Even as the economy comes back online and oil demand starts to recover, there will be hundreds of millions of barrels of oil in storage that owners will be selling for below-market prices, soaking up that demand growth. 

And that will push the recovery for shale and oil sands producers even further out. Many won't survive. There are other energy stocks that offer much better prospects to deliver a profit to investors