What happened
Oil prices are surging today along with a very optimistic stock market. At this writing, both Brent and West Texas crude futures are up more than 7%, while the SPDR S&P 500 ETF Trust (SPY 0.92%) is up 3.3%. Today's surge for the stock market as a whole is a product of three things:
- Optimism about potential a vaccine for COVID-19, with one company reporting positive results in early tests in humans
- Fed Chairman Jerome Powell's comments over the weekend that the U.S. Federal Reserve still has tools at its disposal to keep the U.S. economy and financial system afloat
- Word out of China that the country has already seen oil demand recover much of its decline
Investors are jumping into offshore oil stocks with both feet today. Here are six offshore oil stocks that are up sharply:
| Offshore oil stock | Price chance on 5/18/20 |
|---|---|
| Valaris PLC (VAL) | 8.2% |
| Borr Drilling Ltd. (BORR 2.17%) | 8.9% |
| Oceaneering International, Inc. (OII 0.13%) | 20.2% |
| Helix Energy Solutions Group, Inc. (HLX 0.18%) | 10.1% |
| Noble Corp. (NEBLQ) | 5.9% |
| Transocean (RIG 2.47%) | 5.1% |
As of 2:40 p.m. EDT on May 18. Data source: YCharts.
So what
The offshore oil sector has been one of the hardest-hit during the coronavirus oil crash. Even after today's gains, all six stocks above are still down substantially since the beginning of 2020, even with many other sectors recovering a lot of their losses, and the S&P 500 (represented by the SPDR ETF) only down about 8% since the beginning of the year at present.
Today, investors are looking to capitalize on just how beaten down the subsector is, on hopes that we are seeing the beginning of a sustained recovery in the oil industry.
Now what
Indications that Chinese demand for oil is recovering is a positive for the industry for certain. Oil demand has probably bottomed out in most places; the U.S. economy is starting to open back up in many places, people will begin traveling more, and more goods will surely be shipped in the weeks and months to come than during the past couple of months.
Image source: Getty Images.
However, investors should be very cautious before rushing back into the oil patch too quickly. Global crude oil inventories are still at or near record levels after at least two months of global oil production that far exceeded demand. And even after recent increases, crude oil prices are still unprofitable for most of the world's producers as Saudi Arabia, Russia, and others take steps to make sure they emerge from the 2020 oil crash with more market share than they had to start.
And it's likely that the offshore oil sector will be the biggest loser as a result. Offshore oil is the most expensive to develop and takes the longest to bring to market. Companies will get some work to expand and improve currently producing offshore plays, but it's very unlikely we will see producers pony up for multi-year deals for exploratory drilling or new resource development that many of these companies need to see just to survive the downturn.
Offshore oil stocks have already destroyed massive sums of investor capital over the past two market cycles. It's hard to see many surviving the current downturn in their present form. Keep that in consideration before risking any money in the space.
