Monday morning brought further gains to the stock market, building on an exceptional return last week. Investors continue to hope that the economic recovery has taken firm root, and they're looking to the Federal Reserve to indicate that it will keep providing monetary policy assistance to help push socks higher. As of just after 11 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 271 points to 27,382. The S&P 500 (SNPINDEX:^GSPC) rose 15 points to 3,209, and the Nasdaq Composite (NASDAQINDEX:^IXIC) picked up 25 points to 9,839.

Energy stocks have been the latest sector to rise sharply in the rally, as oil prices have started to return to more normal levels. Among the big winners on Monday morning were Chesapeake Energy (OTC:CHKA.Q) and Callon Petroleum (NYSE:CPE), both of which had seen their share prices drop precipitously during the worst of the coronavirus bear market. Now, energy investors have gone from despair to celebration, with Chesapeake up more than 80% and Callon rising around 50%. Even so, it's tough to predict whether the stocks will sustain their upward moves or give way to another downdraft.

Callon Petroleum logo in blue and orange.

Image source: Callon Petroleum.

A slight disconnect

Perhaps the most surprising thing about energy stocks rising Monday is that they aren't getting the same support from oil prices that they got last week. Crude oil markets are giving up ground, with the front-month contract for West Texas Intermediate oil losing more than $1 per barrel to fall back toward the $38 level. International Brent crude has also fallen, although it stayed above $41 per barrel.

From a broader perspective, the gains for crude have been amazing. In late April, spot oil came close to $10 per barrel, and so current levels represent a near-quadrupling of the price.

Investors are also optimistic about the prospects for those gains continuing. Over the weekend, Russia agreed with OPEC nations to extend the production cuts they put into place a few months ago, with the intent of making them last until at least the end of July. Their hope is that reducing new supply will force energy consumers to work off the immense stockpiles that built up during the worst of the coronavirus pandemic, giving them more leverage over prices in the future.

Higher prices for struggling producers

That news is good for companies like Chesapeake and Callon, both of which have struggled with the plunge in energy markets. High-risk plays on oil and gas left Chesapeake extremely vulnerable to the drop in crude, and many believed that bankruptcy might be inevitable during the worst of the crisis. The company had to resort to a 1-for-200 reverse split in order to meet listing requirements and maintain viability in the eyes of most investors. That puts this morning's move into perspective, as even a stock price that's up 80% to around $45 per share works out to a pre-reverse split equivalent of less than $0.25 per old share.

Callon has also raised concerns about its debt levels. An ill-timed acquisition of Carrizo Oil & Gas late last year hurt Callon's balance sheet badly, and the company desperately needs cash flow from production to finance operations. Although the small exploration and production player has a few years before most of its debt matures, that doesn't give Callon a lot of time to have conditions improve. Ideally, if oil prices can rise further, Callon will look to restructure its debt and buy itself as much time as it can.

Oil stocks have been a challenging place for investors lately, but their recent rebound shows the belief that the industry will survive in the long run. Oil prices rise and fall, but it's important to understand that it's generally the highest-risk players in the sector that see the biggest gains when things go well -- and are most prone to huge declines when they don't.

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.