What happened

Small onshore U.S. oil and natural gas driller Centennial Resource Development (PR -1.33%) and exploration and production giant ConocoPhillips (COP -1.44%) were up roughly 6% today. But that was nothing compared to the 12% advances in industry heavyweight Occidental Petroleum (OXY -1.80%) and far more modestly sized offshore driller Kosmos Energy (KOS -0.98%). Centennial's onshore peer Callon Petroleum (CPE), meanwhile, put those gains to shame, with a rise of as much as 14.5%. And these weren't the only big movers in the sector.

So what

These names span the gamut of the upstream energy industry (exploration and production) from tiny to large (at least fairly large), and from onshore to offshore to a little bit of both. Not a single one of them put out any notable news today, either. So what's going on?

A man sitting in front of computer screens with stock information on them.

Image source: Getty Images.

There is a golden thread connecting all of these drillers: energy prices. And today Brent crude prices, the international benchmark for oil, held above $60 a barrel. That may sound arbitrary, and in some ways it is, but this figure has become a key price point for investors. For starters, it is well above the lows seen during the worst of the 2020 energy rout that took prices down into the $30 range, or even lower at times.  

At $30 a barrel virtually no driller makes money. At $60, most can cover at least their operating costs, if not turn out some profits. So oil holding the $60 line is very good news for Occidental, ConocoPhillips, Kosmos, and Centennial, and many, many more in the energy sector. For some, sustainably higher prices will help the companies recover from self-inflicted mistakes, like Occidental's ill-timed acquisition of Anadarko Petroleum, or debt-heavy balance sheets, like Centennial's. 

The key lately has been that drillers have been acting fairly rationally in the face of severe adversity. Nowhere is that more apparent than OPEC, which has pulled production off the market and kept it off, perhaps learning a lesson from the disastrous price war it got into with partner Russia at the start of the pandemic. And even small U.S. drillers have, so far, resisted the temptation to drill with abandon, largely holding true to their promises to prioritize cash flow and, hopefully, return money to investors. 

SPY Chart

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The flip side of supply is demand, which has also been improving lately. The progress has been slow and uneven, but the excess inventory built up when demand cratered in the early days of the pandemic is being worked off. The hope is that economic activity continues to pick up and supply and demand get back into balance. That's no small task, to be sure, but it is one that appears to be moving in the right direction as vaccines get rolled out around the world. 

Now what

After getting brutalized in 2020, energy is one of the best performing sectors so far in 2021. The SPDR Energy Select ETF is up roughly 17% so far this year while the S&P 500 Index is only up around 4% or so. For investors who braved the industry downturn to buy drillers like Occidental, ConocoPhillips, Kosmos, and Centennial it's nice to be rewarded so quickly. However, don't get too excited just yet. There are still material headwinds to deal with, like weak demand for jet fuel, and the oversupply situation is better but not fully resolved because there's still material amounts of oil in storage in some key markets. In other words, enjoy today, but expect oil prices, and the stocks of exploration and production names, to remain volatile. That includes to the downside, particularly if oil fails to hold the $60 price level it has worked so hard to regain.