Shares of onshore U.S. oil driller Centennial Resource Development (NASDAQ:CDEV) rose as much as 7% in the first 90 minutes of trading today. Going along for the ride were energy services companies Core Laboratories (NYSE:CLB) and Transocean (NYSE:RIG), which witnessed price peaks of roughly 5% and 13%, respectively. Refiner PBF Energy (NYSE:PBF) got in on the action, too, with a gain of just over 11%.
Although all four of the stocks had cooled some by 11 a.m. EDT, each was still holding on to some advances. PBF Energy and Transocean were holding up the best, up 9% and 10.5%, respectively. Part of the story here was higher oil prices, but a broader mood shift in the energy space probably helped as well.
Over the last weekend, news leaked that OPEC had come to an agreement on planned production increases over the next year or so. Given that demand for energy has been generally rising, and is expected to keep doing so as the world starts to recover somewhat from the pandemic, this was a good outcome. However, a new variant of the coronavirus has been spreading quickly around the world, leading some to fear that more stringent measures might be taken to slow its progress. That could result in less energy demand. Taken together, that creates an outlook that includes more supply of oil and less demand for it. That’s not really a good backdrop for the sector, and energy names across the board fell sharply on Monday.
But investors switch between risk-off and risk-on attitudes at a rapid pace these days. Oil prices quickly turned around and have been rising over the past two days. It appears that some viewed the big drop as an opportunity to buy. That follows the saying, “buy the dips,” which is great until the dips are followed by even deeper dips. Still, at least for now, it looks like the move is paying off.
There’s a direct relationship between Centennial Resource Development’s top and bottom lines and improving oil prices, given its upstream drilling focus. Less direct is the link for Core Labs and Transocean, but over the longer term, higher energy prices would normally lead to more drilling. More drilling should mean more demand for the energy services they provide. PBF Energy, which operates in the downstream space, is likely just benefiting from investors’ increased willingness to take on risk in the energy space coupled with its relatively modest size (its market cap is just $1 billion or so). Indeed, the stock has been quite volatile so far in 2021 compared with larger peers.
One day does not make a trend, so investors shouldn’t read too deeply into the price moves here. However, the swift price reversal in the energy space this week is a little more telling. The energy sector has a history of being volatile, but the current mood on Wall Street appears to be even more mercurial than usual.
If you are looking at the energy sector, it probably makes sense to stick with larger, financially strong, and well-diversified names, like the integrated oil majors. You’ll still be on a roller-coaster ride, but the ups and downs probably won’t be quite so intense. And that will help you sleep at night and avoid motion sickness during the day as the market rapidly switches from a buying mood to a selling one and vice versa.
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.
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