What happened?

Shares of oil drilling stocks are flying higher on June 8, following news over the weekend that some of the world's biggest oil-producing nations had reached an agreement to continue output cuts first implemented in April. As of 2:08 p.m. EDT, shares of the following seven oil drilling and oilfield services contractors are up as much as 129% today: 

Oil Driller Price change on 6/8/20
Baker Hughes Co. (BKR 3.02%) 7.1%
Patterson-UTI Energy (PTEN 0.81%) 7.1%
Nabors Industries (NBR 1.48%) 22.6%
Transocean Ltd. (RIG 0.58%) 32.8%
Seadrill Ltd. (SDRL) 113.2%
Valaris PLC (VAL) 125.8%
Noble Corp. (NEBLQ) 128.6%

Data source: YCharts.

So what

Today is a big day for many oil stocks. On Saturday, OPEC+, the group of more than 20 oil-producing nations that includes heavyweights Saudi Arabia and Russia, reached an agreement to extend the deal that cut 9.6 million barrels per day of their combined production through the end of July. This extension helps to stabilize an oil market that has seen a massive collapse in global demand during the COVID-19 pandemic. 

Man holding toy rocket with a surprised expression.

Image source: Getty Images.

The move helps underpin current prices, which are still down more than half from levels at the beginning of the year, but increased sharply over the past month, as demand has recovered from the worst of the coronavirus shutdown. 

Now what

To be blunt, today's massive gains by these oil drilling stocks is way ahead of any fundamental improvements in the oil sector. Crude futures prices are actually down 3.4% today, on mixed news. Beyond the optimism around the OPEC+ deal, things aren't really looking better.

Even with continued cuts, the global oil market remains oversupplied, and even as global demand picks up, it will still take many months to work through excess inventories in storage. As a result, oil drillers won't see a quick return to prior drilling activity. That's especially true for offshore producers like Transocean, Seadrill, Valaris, and Noble. The work they do takes years to deliver oil to the market, and in the current price environment, oil producers aren't going to start green-lighting contracts for offshore drilling.

Nabors, Baker Hughes, and Patterson-UTI will see the benefit of an oil demand recovery more quickly, but we are still months away -- at the soonest -- from any substantial recovery in onshore drilling. The onshore rig counts around the world have continued to fall, and are down more than two-thirds in the U.S. And at recent prices, oil producers simply won't have much appetite -- or in many cases the capital capacity -- to hire any rigs. Drilling activity will come back onshore more quickly, since it can lead to cash flows within weeks, versus years for offshore. But we are still in the phase of declining rigs. 

Simply put, it looks like traders are getting way ahead of the market's fundamentals, particularly for the offshore drillers but even for onshore rig operators. Even as U.S. crude prices have approached $40 per barrel, supply and demand are still way out of whack, and it could be some time before the market is close to healthy again.

Investors would do well to consider those fundamentals, and the implications for these companies, before risking capital they can't afford to lose