What happened

Shares of integrated energy majors ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) were up by mid single digits at lunchtime on April 29. Smaller player Vermilion Energy (NYSE:VET), meanwhile, saw its stock rocket over 12% at the open, before settling down to a high single-digit gain by the middle of the day. Mr. Market was excited about oil today!

So what

There's a glut of oil in the world today. There are a number of reasons for this, including the emergence of U.S. onshore drilling as a major global player over that last decade or so, OPEC and Russia getting into a temporary oil price war (which has now been concluded), and the global economic shutdowns related to the world's effort to slow the spread of COVID-19. Each one of these items could be written about extensively, but the big picture here is that supply is elevated at a time when demand has fallen dramatically and quickly.

Oil rigs with the sun setting in the background.

Image source: Getty Images.

There is so much oil, in fact, that companies are having trouble storing it all. The world's ability to store oil is limited and at this point the storage tanks are nearly full. They've even begun enlisting Suezmax ships, which usually ferry oil around the world, to act as floating oil tanks. Tanker rates have exploded higher. While that's a boon for companies like Nordic American Tankers, it shows just how bad the oversupply situation really is. So it's little wonder that oil prices have been moribund and oil company shares have been punished. 

However, Mr. Market is fickle and his mood can change on a dime. Today, prices for some types of oil have risen by as much as 30%. Normally that would be a massive move, but it's actually not so out of line with the recent ups and downs in the energy sector. There were two pieces of good news driving the upbeat view. First, economies are starting to reopen after essentially shutting down to deal with the spread of COVID-19. That means that demand, which had fallen off a cliff, is likely to start coming back again.    

The other bit of good news was an industry update from the American Petroleum Institute showing that U.S. oil inventories hadn't built up quite as much as expected. That suggests that there may not be as much extra oil floating around as some people think. And, in turn, working down the extra inventory might not take as long as some industry watchers had feared. Before getting too excited here, however, the expected inventory increase was 10.6 million barrels and the actual number came in at 10 million barrels. The direction was right, but the actual numbers weren't huge.   

Still, with those bits of upbeat news as a backdrop, investors bid the shares of oil giants Exxon and Chevron higher. These stocks don't tend to make huge percentage moves; they have diversified businesses that span the energy spectrum from upstream (drilling) to downstream (refining and chemicals), so the mid-single digit advances here are pretty notable. However, the stock prices of smaller players like Vermilion can get pretty volatile. Thus, the mood shift lifted the shares of this heavily leveraged oil company into the double digits before cooler heads prevailed and the gain came down into "just" the high single digits.     

So what

The ultimate truth here is that this is just another day for a volatile commodity working through a major supply/demand imbalance. Yes, big oil price swings will impact the prices of oil companies like Exxon, Chevron, and Vermilion. But there's still a lot of work to be done around the world before energy demand gets back to its pre-COVID-19 levels. And even after that happens, all of the oil that's in storage still needs to be worked off before this vital energy source can mount a sustained upturn. The news was good today, but investors need to be prepared for bad news tomorrow. Energy stocks are likely to remain volatile for months to come as the world adjusts to the dramatic changes that have taken shape in the oil market.