What happened
Shares of Core Laboratories (CLB) rose as much as 5% in early trading on July 1. Following close behind was Centennial Resource Development (PR 0.41%), which rose roughly the same amount. Transocean (RIG -0.69%), meanwhile, jumped a heady 12% shortly after the open.
While all three had given back some of their gains by roughly 11:30 a.m. EDT, the story behind the early price action in these energy industry names was basically all the same: oil prices.
Image source: Getty Images.
So what
Core Labs and Transocean both hail from the energy services sector, providing drilling services for exploration and production (E&P) companies. The industry is highly cyclical, with demand generally high when oil prices are high and vice versa. The logic is pretty simple, given that animal spirits in the oil sector are usually highest when energy prices are elevated, leading to increased drilling activity. And when prices crash, well, E&Ps pull back on drilling activity in an attempt to cut costs. Last year, due to the pandemic, was a year of pullback.
However, as the world has begun the process of reopening after government mandated shutdowns, oil demand has picked back up. And so, as you might expect, have oil prices. Although drillers, particularly in the U.S. energy space, have remained fairly disciplined with their spending, investors have been increasingly upbeat about energy services companies like Core Labs and Transocean. Today, oil prices rose to more than $75 a barrel, a level that hasn't been reached since 2018.
That single number, however, doesn't do justice to the price advance in this important global fuel. For example, key U.S. oil benchmark West Texas Intermediate (WTI) is up more than 50% so far in 2021. Although drillers have tread carefully on the capital spending front so far, investors are likely expecting higher oil prices to boost demand for service providers. And hitting notable price levels often gets stock investors a little extra excited.
That said, higher prices also help heavily leveraged drillers like Centennial Resource Development, which is likely why this U.S. E&P name jumped early on today. There's nothing fancy about this logic, which is pretty direct: Higher energy prices flow right through to the company's top and bottom lines, making it easier to support the debt on its balance sheet and even, perhaps, to pay it down. Which helps explain why higher oil prices likely got investors excited about Centennial today.
Now what
Energy is a commodity, so prices move around quite a bit. By roughly 11:30 a.m. EDT global benchmark Brent Crude remained above $75 a barrel, but WTI had slipped slightly below that number. As noted above, Core Labs, Transocean, and Centennial had all pulled back from their early highs, too. Indeed, investors shouldn't read too deeply into one day, or even a few hours, of trading in the energy sector. In fact, most investors looking at the energy space would probably be best served by focusing on financially strong and diversified integrated energy companies like Chevron. It probably won't be as exciting a stock, but that's kind of the point.
