What happened

Oil stocks plunged this morning, and there was a lot more to the rout in the oil and gas sector than just Friday's stock market sell-off. Here's how much some of the biggest oil stocks had fallen at their lowest points during the day:

Although most of these stocks regained some ground as the day progressed, each still closed the shortened trading day in the red. 

So what

On Thursday, news came from South Africa about a new coronavirus variant that's reportedly highly infectious and has several mutations. That sparked fears across the globe and compelled the World Health Organization to designate the new variant, named Omicron, as a variant of concern. Some countries have already swung into action: The U.K., for example, was quick to ban flights from countries where the variant has been found.

As Friday was the first trading day in the U.S. since the news from South Africa came out, stocks across most sectors saw a massive sell-off on renewed fears of lockdowns that could jeopardize economic recovery. Travel and cruise stocks, for example, were among the worst-hit Friday, as the new variant has already triggered travel restrictions in some parts of the world.

Workers working on an oil field in the evening.

Image source: Getty Images.

The transportation sector is also a major oil consumer, so oil prices sank, as did oil stocks as bitter memories of 2020 resurfaced, when the U.S. benchmark West Texas Intermediate (WTI) dropped to negative at one point as demand for oil sank globally in the wake of pandemic-induced lockdowns.

As of the time of this writing, the WTI and Brent crude prices had crashed more than 10% each on Friday, marking the biggest one-day fall since April 2020.

Today's oil price crash comes at a time when players in the oil industry were already getting jittery after the U.S. government vowed to release millions of barrels of oil from strategic reserves earlier this week in a bid to bring down prices, with multiple nations including China, India, Japan, South Korea, and the U.K. joining in.

Oil stocks couldn't have been spared after the plunge in crude prices. So whether it's oil producers or midstream companies, shares of businesses across the oil and gas sector plummeted. Oil exploration and production companies got hit the hardest, as is typically the case. Upstream oil companies are most vulnerable to the fluctuations in crude prices as they directly affect their cash flows and capital spending plans.

This has been a banner year for investors in oil stocks. Companies saw their cash flows boom on rising oil prices, and many decided to return larger chunks of cash to shareholders in the form of big dividends. Marathon Oil, for example, increased its dividend for the third consecutive quarter in October, representing a cumulative dividend raise of 10% since the end of 2020.

Investors are worried the new coronavirus variant -- and any consequent fall in the demand and pricing of oil -- could bring those days of hefty returns to a grinding halt, especially from stocks that have pegged their dividends to cash flows.

DVN Chart

DVN data by YCharts.

Devon Energy, for example, introduced a new fixed-plus-variable dividend policy earlier this year, under which it's paying out a fixed dividend of $0.11 per share, and a variable dividend of up to 50% of its incremental cash flows (i.e., 50% of cash flows left after capital expenditures, fixed dividends, and one-time expenses, if any). Rising oil prices and Devon's surging cash flows helped it to boost its total dividend payout by a whopping 71% sequentially. Its new dividend policy, which remains attractive, also explains why Devon Energy has turned out to be one of the top-performing oil stocks this year.

Now what

Friday's sell-off in oil stocks wasn't unwarranted, but no one saw the knee-jerk movement in oil prices coming. While it's too early to say what the implications of the new coronavirus variant could be for the demand for oil and economic growth overall, oil prices could continue to be volatile for one big reason: OPEC's upcoming policy meet on Dec. 2. All eyes will now be fixed on that event to see whether the oil producers will stick with their current output plan to increase oil supply gradually every month even after the oil price rout. OPEC's decision typically has a bearing on oil prices, and therefore oil stocks, so keep an eye out. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.