Why Oil and Gas Stocks are Popping Today
What
happened
Oil
prices bounced back on Wednesday. The U.S. oil benchmark, WTI, surged more than
4% to around $55 a barrel, which reversed yesterday's 2.1% slide, and then
some.
This
rally fueled a rebound in most energy stocks. Leading the way was Whiting
Petroleum (NYSE:WLL), Antero Resources (NYSE:AR), and Nabors Industries
(NYSE:NBR), which were all up more than 10% by 2:30 p.m. EDT.
So
what
Fueling
today's rally in the oil market was growing geopolitical optimism and forecasts
that U.S. oil inventory levels will continue falling. Most analysts expect that
the U.S. Government will report a 3 million barrel decline in crude oil storage
levels this week. That would mark the third straight drop, which would imply
that demand growth remains healthy.
With
oil making a big move today, oil and gas stocks are following suit. That's
because they make more money at higher oil prices. Whiting and Antero both have
lots of leverage to the oil market, which is why they were among the biggest
movers.
Whiting
gets 81% of its production from oil and natural gas liquids (NGLs), which
derive their value from crude prices. That's the fourth-highest percentage in
its peer group. Because of that, when crude makes a big move, it will have a
notable impact on Whiting's cash flow as long as it's sustainable.
Antero
Resources, meanwhile, primarily produces natural gas. However, it's also the
nation's second-largest NGL producer. Because of that, it has significant
exposure to the oil market, which causes volatility in its cash flow when crude
prices fluctuate. With oil heading higher today, its cash flow could improve as
long as this trend continues.
Nabors
Industries, on the other hand, doesn't produce any oil or natural gas. Instead,
it operates rigs that drill new wells for producers. Demand for Nabors' rigs
tends to ebb and flow with oil prices. Given that crude had been in a slump
over the past few months, the rig market has softened. While Nabors currently
expects that trend to continue throughout the third quarter, a bounce back in
oil prices due to improving market conditions would likely put an end to that
slide.
Now
what
The
primary driver of today's rebound in the oil market wasn't data but hope.
Because of that, crude prices could quickly reverse course if the government's
storage numbers don't decline as much as analysts expect or if macro-economic
data deteriorates.
That's why investors should avoid buying oil stocks solely based on today's optimism. Instead, they should wait to see if the data supports the view that market conditions are improving before buying, to potentially profit on a rebound.