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Oil Rolls Over and Takes Oil Stocks Down With it

By Matthew DiLallo – Feb 9, 2016 at 9:41PM

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Southwestern Energy, Whiting Petroleum, Nabors Industries, Targa Resources, and Targa Resources Partners were all down double digits today.


What: Despite a very bearish oil market report that was released earlier today by the International Energy Agency, oil remained pretty calm for most of the day, trading at right around $30 a barrel. That calm didn't last, with oil slumping in the mid-afternoon and closing down 5.9% to just under $28 per barrel. That, of course, sent oil stocks spiraling lower, with Southwestern Energy (SWN -7.38%), Targa Resources (TRGP -8.71%), Targa Resources Partners (NYSE: NGLS), Whiting Petroleum (WLL) and Nabors Industries (NBR -13.96%) all down double digits by 3 p.m. EST on Tuesday.

So what: The IEA threw cold water on the idea that low oil prices are fueling robust demand for oil. After global oil demand growth rose to a five-year high last year at 1.6 million barrels per day, demand growth this year is expected to be slower at 1.2 million barrels per day, despite the fact the oil price is much cheaper. That's due to notable slowdowns in demand from Europe, China, and the U.S. Making matters worse, globally supplies continue to remain elevated and only pulled back by 200,000 barrels per day in January after higher OPEC volumes offset most of a half million barrels per day production decline from non-OPEC members. Because of this global crude oil inventories continue to build, which is what's really weighing on oil prices right now because the market is running out of places to store this oil.

That's not the news that oil and gas producers like Southwestern Energy or Whiting Petroleum want to hear, because it confirms that the industry will likely remain stuck in a lower for longer commodity price environment, which will put even more pressure on their cash flows and balance sheets. Likewise, it will continue to mute oil and gas drilling activity, which isn't good news for Nabors either. Even midstream companies such as Targa Resources and Targa Resources Partners are feeling the pain of a lower for longer scenario because some of their growth is based on volume growth in key shale plays, which won't happen until oil prices improve. Further, Targa Resources has some exposure to weak oil prices because it processes NGLs, which are linked to the oil price.

Now what: OPEC is clearly not going to give up on its push to win more control of the oil market, which is why it keeps pumping more oil despite the fact that its price keeps coming down. It's hoping that by pushing prices down it can have a devastating financial impact on its rivals, which would then keep their ability to grow production at bay for years to come, leaving OPEC in a prime spot to really cash in once prices eventually rise. It's a risky strategy, but according to the IEA it is one that's poised to pay off with OPEC likely to see its share of the oil market rise to 50% of the by 2030, which is something it hasn't enjoyed since the early 1970s.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Whiting Petroleum Corporation Stock Quote
Whiting Petroleum Corporation
Nabors Industries Ltd. Stock Quote
Nabors Industries Ltd.
$94.40 (-13.96%) $-15.31
Southwestern Energy Company Stock Quote
Southwestern Energy Company
$6.28 (-7.38%) $0.50
Targa Resources Corp. Stock Quote
Targa Resources Corp.
$59.75 (-8.71%) $-5.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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