What happened
Shares of energy services company Core Laboratories (CLB +0.00%) rose as much as 7.5% in the first 90 minutes of trading on Wednesday. Relatively small onshore U.S. exploration and production companies SM Energy (SM 1.16%) and Centennial Resource Development (CDEV +0.38%), meanwhile, were up 12% and 16.5%, respectively, at their peaks.
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There was no particular news out of any of these energy sector names, but there was a notable update out of the International Energy Administration (IEA). And it followed a similarly upbeat report out of OPEC the day before. Investors seemed to like what they read.
So what
On April 13, OPEC announced that it was increasing its oil demand projections for 2021. Today the IEA basically announced the same thing. The story out of both of these key industry names is roughly similar: As vaccines roll out and economic activity rebounds, demand for oil is expected to rise. That increase will help to get the supply/demand picture in the energy sector back into balance by sopping up excess oil and gas that was put into storage when demand tanked in the early days of the pandemic.
The increasingly upbeat news flow sent energy prices sharply higher in early trading today. This has a notable impact on exploration and production names like SM Energy and Centennial, where their top and bottom lines are basically driven by the prices of the commodities they produce. They are both relatively small players in the sector with market caps of $1.3 billion and $2.1 billion, respectively, and each is carrying material debt on its balance sheet. As such, energy price increases tend to have a sizable impact on investor sentiment here. The logic is pretty simple: Higher prices would translate into higher revenue and earnings, making it that much easier for these drillers to deal with their debts while still making the necessary capital investments in their businesses.
That brings the story to Core Labs, which provides well enhancement services to drillers. Rising oil prices suggest that exploration and production companies might start to increase drilling again, after it fell sharply during the pandemic. That, in turn, would likely lead to increased spending on the types of services that Core Labs provides, increasing its revenue and earnings. And that would be a good thing for the company and its shareholders.
Now what
Although it would be hard to call OPEC and IEA updates noise, investors should look at the market move here with a little skepticism. The outlooks provided by each of these organizations have risen and fallen dramatically over the past year or so, causing repeated ups and downs in energy prices and related stocks. Yes, the news from yesterday and today is good and investors are probably right to be excited. But the energy price gains and the stock moves at Core Labs, SM Energy, and Centennial Resource Development could end up being short-lived if bad news comes out.
And the truth is, that could happen tomorrow (if not sooner) if history is any guide, given that the energy sector has a history of being rather volatile. Unless you are looking to try to time the sector's moves, most long-term investors looking at the space would probably be better off avoiding more-volatile names and focusing on large and diversified industry players like Chevron.
