What happened
Shares of some of the largest independent oil producers in the U.S. are rocketing higher today on news that the European Union has reached agreement on $2.1 trillion in economic stimulus. News of this mega-deal to help businesses and families struggling under the weight of the severe global recession is lifting oil prices to the highest levels in more than four months.
The following oil producer stocks are some of the biggest gainers on the news:
| Oil producer | Price change on 7/21 |
|---|---|
| Matador Resources Company (MTDR 0.71%) | 10.5% |
| Devon Energy Corporation (DVN 0.84%) | 11.3% |
| Diamondback Energy (FANG 0.88%) | 9.4% |
| Murphy Oil Corporation (MUR 0.24%) | 9.5% |
| WPX Energy (WPX) | 10.1% |
| Apache Corporation (APA -1.26%) | 10.3% |
| QEP Resources (QEP) | 14.5% |
| Comstock Resources (CRK) | 8.6% |
| Northern Oil and Gas (NOG 1.05%) | 9.4% |
| Parsley Energy (PE) | 8.2% |
| Callon Petroleum Company (CPE) | 8.9% |
Data source: YCharts.
So what
Both Brent and West Texas Intermediate futures prices are up more than 2% today, as oil traders consider the implications of more than $2 trillion in economic stimulus helping drive up demand for oil in Europe. Europe is a major market for U.S. crude and crude products, so there's certainly reason for oil prices to climb on today's news.
It's not just higher prices that have investors' hopes climbing, either. The past four months have been some of the most brutal in oil industry history. The shock to demand from the coronavirus pandemic hit U.S. producers after years of fast growth, catching them flat-footed and with production that was well above what the market was able to soak up.
Output has fallen off sharply, but between imports that have stayed relatively stable and demand that's still down by double digits, crude prices are still at levels that haven't sustained for this long and low in well over a decade:
Continental US Crude Oil Field Production data by YCharts
Now what
The EU's stimulus deal is significant and massive. But it's also just a temporary lift for a problem we don't yet have a permanent solution for. The novel coronavirus that causes COVID-19 remains an enormous threat to human lives. There are several hopeful vaccine candidates, but it takes long-term studies over more than a year to understand the risks of side effects across a broad cross section of the population. In other words, even a medical breakthrough could be further away than investors either understand or want to acknowledge.
Image source: Getty Images.
Next, investors need to consider the economics of oil and the ongoing struggles the industry still faces. With oil prices still in the low $40s, most U.S. oil producers will struggle simply to break even, much less make a profit. And with global giants like OPEC and Russia primed to turn on their pumps at the first signs of demand recovery, the path forward isn't going to be easy for U.S. producers.
Today's news is positive, but it's like a box of band-aids at a knife fight. U.S. oil producers remain one of the highest-risk segments of the market right now. Most simply are not equipped with the tools -- low-cost oil and plenty of liquidity -- to make them worth taking on the risk that economic conditions will improve sooner rather than later.
