What happened

Oil prices are joining the broader stock market by tumbling today. WTI, the primary U.S. oil price benchmark, was down more than 7% by 10:15 a.m. EDT on Thursday, pushing it below $37 a barrel. The main weights were rising oil inventory levels in the U.S. and concerns that COVID-19 cases are on the rise, which could affect oil demand in the coming weeks.  

This sell-off took most oil stocks with it. Among the notable names under pressure today were leading service companies Enterprise Products Partners (NYSE:EPD)National Oilwell Varco (NYSE:NOV), and ONEOK (NYSE:OKE), which all fell by at least 10% in early-morning trading. 

A price chart heading lower with oil barrels in the background.

Image source: Getty Images.

So what

Oil service providers like Enterprise Products Partners, National Oilwell Varco, and ONEOK had been rallying almost nonstop until earlier this week when the oil market started coming back down to earth. From April 1 through June 8, Enterprise Products and National Oilwell Varco rebounded 62% and 77%, respectively, while ONEOK soared more than 150%. The main fuel driving those surges was an epic rebound in oil prices as the market stabilized thanks to OPEC's help and the reopening of nonessential businesses and travel.

However, the oil market's enthusiasm has started to wane over the past few days despite an extension of OPEC's initial production cuts over the weekend. One downer came from investment bank Goldman Sachs, which warned that refining margins showed weakness because the demand for refined products wasn't growing as fast as crude prices. That could cause refiners to trim volumes, weighing on consumption. Meanwhile, oil company CEOs have expressed their surprise and skepticism over the recent oil price rebound. ConocoPhillips (NYSE:COP) CEO Ryan Lance recently said he was surprised by the quick bounce and that he expects prices to remain volatile. Because of that, ConocoPhillips isn't ready to join many of its peers in bringing shut-in volumes back online.    

Given comments like those, it seems unlikely that U.S. production will bounce back to pre-COVID-19 levels anytime soon. That will keep the pressure on the cash flows of midstream companies like Enterprise Product Partners and ONEOK as well as service providers such as National Oilwell Varco.

The volume concerns hit ONEOK hard earlier this year. The company initially expected significant volume and cash flow growth, fueled by recently completed pipeline projects. However, it watered down its outlook earlier this year. That caused some concerns that the company might need to reduce its dividend and use its cash to pay down debt.  

However, thanks to the recent run-up in its stock price, ONEOK unveiled today that it plans to sell at least 26 million shares in a secondary offering. While that's a significant dilution -- about 6.3% of its current shares outstanding -- the offering could raise about $1 billion in cash. That would help ease its balance sheet concerns, increasing the sustainability of the dividend. 

Now what

The oil market is taking a bit of a breather following a massive rebound over the past couple of months. That's not a surprise, since the industry still has its share of problems, not least of which is that demand is just starting to come back following a significant economic upheaval. This recovery will likely have its share of fits and starts over the coming months, meaning investors need to steel themselves for lots more volatility.