Crude oil futures are falling sharply following news that President Donald Trump has been diagnosed with COVID-19. At this writing, both West Texas Intermediate and key international benchmark Brent crude are down 4%. If current prices hold through closing, Brent's $39.33 per barrel and WTI's current $37.12 would be the lowest closing prices for either since June. 

Oil barrels stacked outside of a facility.

Image source: Getty Images.

Oil stocks move higher even as oil crashes to second-half lows

When oil prices fall sharply, oil stocks tend to go along for the ride. Today, many oil stocks are rallying higher, and it's hard to identify an obvious reason. The Energy Select Sector SPDR ETF (XLE -0.74%), which tracks the 26 energy stocks in the S&P 500 Index, is up about 1%, while the broader stock market is down today. Oil producers  Devon Energy (DVN 0.33%)Diamondback Energy (FANG -2.30%), and Apache  (APA -2.62%) shares are some of the biggest gainers, up more than 4% today. As of this writing, 22 of the 26 S&P 500 energy stocks are higher, and of the four that have fallen, only Hess (HES 0.10%) shares are down more than 1%. 

Why a mini-rally for oil stocks when crude is crashing? It's possible that indexes are rebalancing their energy holdings, since we are now in the fourth quarter. Additionally, investors could be buying with the expectation that congressional progress on economic stimulus (the House just passed a bill) could boost demand for oil in the months ahead. 

Supply-and-demand still a worry, along with the gorilla in the oil patch

The energy sector has been bludgeoned this year by a massive drop in demand, and the months it took producers to cut output to slow a record buildup of inventories around the world. Progress has been made in the past few months, with global demand growing enough, along with those output cuts, to start working through that excess inventory. But there are signs that producers are ready to crank the pumps back up. 

Already in the past month we have seen Libya bring its oil industry back on line, adding about 300,000 barrels per day in exports in recent weeks, with a goal to get back to its prior levels above 1 million barrels per day. Saudi Arabia, the global giant with some of the cheapest oil on earth, has also acted more aggressively with pricing, its most powerful weapon to regain market share. 

And casting its shadow over all of this is the coronavirus pandemic; the news of another world leader catching the coronavirus (along with British Prime Minister Boris Johnson, Brazil's Jair Bolsonaro, and Russian Prime Minister Mikhail Mishustin) is a stark reminder that the dangerous illness still presents an enormous threat to the global economy. 

Step lightly

The biggest risk along the oil industry's path to recovery is the coronavirus, which has erased global demand in an amount roughly the equivalent of Saudi Arabia's entire oil exports. As long as the global industry remains in such a deep state of weakened demand, Saudi Arabia and its peer states that control the oil industries in their countries are likely to fight a bloody fight for market share. 

As a result, U.S. oil, which has grown sharply in recent years at much higher prices, has the most to lose. Most oil producers can't compete with oil in the $30s, and many can't survive at these levels. And while there are a handful that should have little trouble riding out even a protracted downturn in prices and weak demand, there's a big difference between being able to ride out the downturn, and being worth investing in.