What happened
Shares of offshore oil driller Kosmos Energy (KOS -0.68%) rose as much as 15% on Nov. 18, moving steadily higher from the open until around 11:30 a.m. EST. At roughly 12:30 p.m. EST the stock was still holding on to most of its gain, up around 12%. The rising price of oil was the main factor, but there's a story behind that move that you need to understand.
So what
Kosmos is an energy company, and its top and bottom lines are driven by the often volatile price of oil and natural gas. Energy prices have been low lately because of a massive supply/demand imbalance. A huge part of the imbalance is related to the economic shutdowns being used to slow the spread of the coronavirus, which have resulted in a rapid and large decline in demand. With far too much supply and reduced demand, oil and gas prices fell -- just as you'd expect in an oversupplied market. At this point, with economic activity starting to pick up again despite a resurgent virus, energy prices have risen off their worst levels of the year but still remain low and range bound.
Image source: Getty Images.
One of the biggest headwinds for oil and natural gas of late has been an excess of these fuels sitting in storage. That's where unneeded oil and gas went when demand declined earlier in the year. It has to be worked off before energy prices can move sustainably higher, but with demand still relatively weak thanks to COVID-19, that's likely to be a long process. Which brings the story to today. OPEC has been reducing its output in an effort to fix the imbalances in the energy sector. The group's current round of cuts is set to expire soon, but investors are increasingly of the mind that it will further extend its cuts to help offset the still-high inventory levels in the U.S. market. That backdrop has energy investors in an upbeat mood. And as oil prices pushed higher, so did the shares of Kosmos Energy.
Now what
One day doesn't make a trend. Oil and natural gas prices are notoriously volatile. Thus investors shouldn't read too much into Kosmos Energy's stock price gain today. It could lose just as much tomorrow if Wall Street suddenly turns bearish on oil and oil drillers, especially if OPEC doesn't extend its cuts as investors currently expect. In fact, if you are looking at the energy sector for stocks to buy, you'd probably be better off sticking to the largest, most diversified, and financially strongest names, like goliath Chevron with its $180 billion market cap, as opposed to relatively small drillers like Kosmos, with a market cap of $700 million.
