What happened

In a brutal day for investors in just about every asset class, oil stocks are taking it on the chin especially hard. Crude oil prices are down more than 5% following a significant build in commercial crude oil in storage in the U.S., a worrying sign that oil producers are set to face more pressure if the recent surge in COVID-19 cases around the world impacts economic activity and thus oil demand. 

As of 2:57 p.m. EDT, companies across the range of oil and gas operations were down sharply: 

Company Name Sector Price Change on 10/28
Chevron (NYSE:CVX) Integrated Oil & Gas Major (3.3%)
Core Laboratories (NYSE: CLB) Oilfield Services (6.9%)
Devon Energy (NYSE:DVN) Oil & Gas Exploration & Production (5.8%)
Diamondback Energy (NASDAQ:FANG) Oil & Gas Exploration & Production (6%)
Halliburton (NYSE:HAL) Oilfield Services (8.1%)
HollyFrontier (NYSE: HFC) Oil Refining & Marketing (6.5%)
National Oilwell Varco (NYSE: NOV) Oil & Gas Equipment Manufacturing (6.2%)
Range Resources (NYSE: RRC) Natural Gas Exploration & Production (8.4%)

Prices as of 3:08 PM EDT

So what

The biggest single reason for the sharp decline of all of these stocks is a reaction to the drop in crude oil prices. Also relevant is the worrying conditions of the oil market as a whole. Cases of COVID-19 are on the increase, putting the modest recovery in oil demand over the summer at very real risk of contracting.

Both the U.S Energy Information Administration and the American Petroleum Institute conduct weekly surveys to measure the amount of crude oil in U.S. commercial storage facilities. The most recent surveys concluded that commercial crude oil inventories increased between 4.3 million and 4.6 million barrels last week. Analysts were expecting an increase but a much more modest bump of about 1 million barrels. 

Screenshot of oil and gas prices falling.

Image source: Getty Images.

At the same time U.S. oil inventories are increasing, international output is on the rise, with Syria having already added as much as 800 thousand daily barrels to the market in the past six weeks. The country is expected to add another 200 thousand over the next couple of weeks as it brings total output to 1 million barrels per day. 

Now what

The global oil market is at severe risk of contracting under a resurgent coronavirus pandemic, and the timing couldn't be worse on the supply side, with production starting to ramp back up in a number of major oil markets, putting downward pressure on oil prices as the global heavyweights get ready to battle it out over a shrinking market. 

Saudi Aramco's CEO recently said that oil demand is still too weak for OPEC+, the consortium of oil-producing nations that includes Russia, to start easing up on the production cuts agreed to earlier this year. Outside of China, which has largely kept the coronavirus outbreak under control and seen oil demand recover to pre-crisis levels, global oil demand faces a very uncertain path forward over the next several months. 

Frankly, it could be well into 2021 before a post-COVID path becomes clear, and that will weigh heavily on the oil and gas industry for some time to come. And that's before factoring in the long-term risks of losing market share to renewables. 

Put it all together, and investors should continue to tread lightly here. So long as the global petro-states are dealing with a reduction in output, their pricing power will weigh on commercial oil and gas interests that are fighting for market share. That's not to say the strongest companies -- many of which are listed above -- won't survive. The point is, there's a difference between surviving and being worth investing in. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.