What happened
Shares of U.S. exploration and production company Centennial Resource Development (PR -0.17%) fell as much as 6% in the first half hour of trading on Nov. 12. That's not shocking given that oil and natural gas prices were weak in early trading. That said, by around 10:30 a.m. EST energy prices had stabilized and Centennial shares were at about the break-even mark.
So what
There are a couple of big-picture issues here. The first is central to Centennial Resource Development. It is a small and heavily leveraged energy company. Add in a stock price that's soundly in penny-stock territory, and it doesn't take much for a material percentage move in the shares. Thus, even modest market developments can have a material impact on Centennial's stock. In fact, there are times when the stock makes dramatic percentage moves without any news at all.
Image source: Getty Images.
Today, however, the drop was likely related to the International Energy Agency (IEA) suggesting that demand for energy is still being hampered by the impacts of COVID-19. The oil watcher noted that the industry might not see a material upturn until 2021. And that update comes on the heels of OPEC saying that oil demand is still under material pressure in the near term, so the IEA simply piled more bad news on to what was already a negative bias. Both of these industry updates are clear negatives for a small and heavily leveraged oil driller.
Now what
Oil and natural gas are commodities prone to swift and often dramatic price moves. Centennial Resource Development shares tend to go along for the ride, both up and down. And sometimes, because of a low share price, it can put up big moves for no reason at all. Most investors looking at the energy sector would be better off sticking to larger and financially stronger companies. Indeed, volatility is highly likely to remain elevated here for some time to come.
