What happened

Shares of globally diversified integrated energy company ExxonMobil (NYSE:XOM) fell more than 7% as the trading day began on June 11. Peer Chevron (NYSE:CVX) followed, dropping as much as 6.7% in the first half hour on Wall Street. To a large degree, these declines tracked the broader market, where the S&P 500 Index fell dramatically on concerns that the U.S. recovery from COVID-19 and the economic impacts of the effort to slow the coronavirus' spread weren't going to be as swift as expected in recent days.

And yet there's more of a story to tell in the oil patch.

So what

An economic recovery is vital for the energy sector if oil prices are to recover, and that will depend partially on how quickly the world moves past, or at least learns to deal with, COVID-19. So bad news on both of these fronts isn't good for Exxon or Chevron. Indeed, the U.S. Federal Reserve's recent economic comments were hardly uplifting (the need to keep rates low for longer is a bad omen), and neither was the news of rising coronavirus cases in states that have reopened for business.

A spinning roulette wheel.

Image source: Getty Images.

So it's hardly a surprise that oil prices cratered at the open of trading on June 11. Since Exxon and Chevron's top and bottom lines are both tied directly to the commodity, they fell.

However, the dramatic price action in Chesapeake Energy's (OTC:CHKA.Q) stock tells just how crazy things have gotten in the energy market. Chesapeake's shares fell 16% at the open but were up nearly 30% by 10:15 a.m. EDT and quickly fell back down to a gain of "just" 13% by 10:30 a.m. This is a company that, for months, has looked like it is close to declaring bankruptcy. In fact, after the close on June 8, Bloomberg, citing sources close to the situation, said a Chapter 11 filing could happen any day.

Chesapeake plunged the next two days. That, however, followed a massive price run-up the two days before on news that OPEC had agreed to extend production cuts and that U.S. onshore drillers were starting to reopen closed wells. Investors are clearly vacillating between risk on and risk off, with what appears to be a healthy dose of gambling thrown in with regard to high-risk names.

It's important to remember that stockholders are usually wiped out during a bankruptcy, so investors buying Chesapeake here are speculating at best. But Chesapeake isn't the only oil stock that's seeing crazy gyrations, as many of the onshore U.S. drillers have witnessed dramatic price swings over the last week.

Exxon and Chevron, by comparison, have been relatively stable. That said, the price moves these giants experienced today are material for large integrated oil majors. By 10:30 a.m., their losses had moderated to between 4% and 5%.

The relatively gloomy view that Wall Street has taken over the last few days is probably a healthy dose of reality. While OPEC extending production cuts is good news, OPEC members have a bad habit of ignoring the quotas to which they agree. Increasing U.S. production as shuttered wells are reopened, meanwhile, could offset any benefit from OPEC's cuts. If COVID-19 sees a resurgence, a weak U.S. economy (which is the largest in the world) could continue to struggle and retard a demand recovery.

Meanwhile, there's a significant amount of oil in storage that still needs to be worked off, and it continues to be a major headwind to a sustained rise in oil prices. The painful mismatch between supply and demand is not solved by any stretch of the imagination. Oil and the companies associated with the industry are still struggling to deal with very real issues.

XOM Financial Debt to Equity (Quarterly) Chart

XOM Financial Debt to Equity (Quarterly) data by YCharts.

And this doesn't even consider the company-by-company factors that investors also need to look at. Chesapeake, with a heavy debt load, is a prime example. To be fair, giants Exxon and Chevron have among the strongest balance sheets in the energy sector. Both Exxon and Chevron, for reference, have sizable investments in onshore U.S. drilling assets, if that's an oil region of interest. All in all, investors looking to invest in energy would be better served taking a risk on these two giants than a smaller, financially weak player like Chesapeake. But even then, neither Chevron nor Exxon can be viewed as a low-risk investment today. There are just too many moving parts and too many uncertainties.

Now what

The energy sector is, in normal times, prone to large and swift price changes. Over the last week, those price moves have become even more pronounced. Most investors would probably be better off stepping back and watching the fireworks here. If you feel the need to own an oil company, sticking to financially strong giants like Chevron and Exxon is probably a better idea than betting that smaller companies with material leverage will turn out to be winners.