Shares of U.S. onshore oil driller Centennial Resource Development (NASDAQ:CDEV) fell roughly 9% when trading got underway on July 19. That drop, however, isn’t at all shocking given that oil prices opened sharply lower today. What’s really important is why.
Over the past week or so, OPEC and its partners have been trying to come to terms over oil production quotas. It was generally agreed that more oil was needed to supply the market, given increasing demand as the world slowly learns to deal with the coronavirus. The problem was that specific members wanted to pump more oil than they had previously been allowed relative to their own history and to peers. Oil prices were volatile while ongoing discussions delayed a final decision.
The fear was that OPEC wouldn’t be able to achieve a consensus and that a mad grab for market share would erupt in which way too much oil might be produced. That, along with the pandemic, is effectively what roiled the energy markets in early 2020, sending U.S. oil prices below zero at one, somewhat frightening, point in time. Thankfully, over the weekend OPEC reportedly came to an agreement that, at least for now, assuages all parties. But the positive outcome here isn’t exactly great for oil markets, as it means that more supply is coming down the pike. It’s a better outcome than a price war, but oil prices falling on the news of production slowly increasing over the next year or two isn’t all that shocking.
Centennial Resource Development’s top and bottom lines are driven by the price of energy, so it just fell along with oil. And the stock has a history of being rather volatile, so a big move here based on industry news isn’t shocking, either. The key takeaway, however, is that the supply of oil is heading higher from here. Investors need to consider how that plays with their long-term investment thesis in an often emotionally driven name like Centennial.
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.
View more information: https://www.fool.com/investing/2021/07/19/why-centennial-resource-development-fell-sharply-a/