What happened

Shares of independent oil producers are surging on May 18, following word out of China that the country's domestic consumption of oil has recovered much more quickly than expected. According to reports from Bloomberg, refined oil products like gasoline and diesel are being consumed at close to the levels in China earlier this year, before the country implemented severe limits on travel to arrest the spread of coronavirus.

As a result of this news, crude futures moved much higher around the world. Brent and West Texas Intermediate futures, for July and June delivery respectively, are up more than 7% at this writing to the highest levels since early March.

And this has stocks of independent oil producers up by double digits:

Oil producer Price change on 5/18/20
Continental Resources (NYSE:CLR) 13.6%
SM Energy (NYSE:SM) 13.5%
Matador Resources (NYSE:MTDR) 15.4%
Noble Energy (NASDAQ:NBL) 14.3%
Centennial Resource Development (NASDAQ:CDEV) 11.5%
Devon Energy (NYSE:DVN) 10.5%
Murphy Oil (NYSE:MUR) 8.7%

As of 1:45 p.m. EDT on May 18. Data source: YCharts.

So what

It's been a really tough three months for the independent oil producers above. Since oil prices started falling in earnest in late February, global oil demand fell as much as 30 million barrels per day, while global oil output hasn't dropped nearly that quickly. As a result, not only did oil prices fall to some of the lowest levels since the 1990s, but U.S. crude futures actually spent almost an entire trading session in negative prices in late April.

Since then, prices have steadily increased as more global production has come off, and the demand collapse reached bottom. Today's news that China, the epicenter of the COVID-19 pandemic, is showing a nearly full recovery in oil demand has sparked a race to get back into oil stocks as early in the recovery as possible.

Oil and gas prices on a computer screen with a green up arrow

Image source: Getty Images.

Now what

Let's apply a healthy dose of context to today's news out of China, along with the reality on the ground in the oil patch. On the one hand, it's certainly good economic news that China's transportation and industrial consumption of oil has recovered quickly, and it offers hope that we could see a quicker recovery in other parts of the world as well.

Now let's look at the other hand: The oil market remains in disarray, and U.S.-focused producers are still facing months of weak demand and low prices. Global crude futures are still in the $30s, prices that few global oil producers can make any money at, and far below the levels U.S. producers need just to break even on a cash basis.

One of the things compounding this is the massive glut of oil that could still be building, even as demand in places like China recovers. While the U.S. Energy Information Administration reported a 700,000 barrel drawdown in U.S. crude inventories last week, the American Petroleum Institute's analysis of data from oil producers concluded that oil inventories were higher, not lower.

Add it all together, and while most oil producer stocks are climbing today, they certainly don't all have rosy prospects. If you're interested in buying during this oil rally, make sure you do your research. We've already seen some oil companies go bankrupt, and more bankruptcies are coming. The oil market will eventually recover as we get past COVID-19. But it's still playing out, and many oil producers won't survive to see the recovery.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.