What’s Wrong With Oil and Gas Stocks Right Now?

Oil prices dropped this week and that’s hurting oil stocks.

Oil prices dropped like a rock this week and that hit oil-related stocks hard. Ironically, it was OPEC+ extending production cuts that sent oil lower, which seems a little backward.

According to data provided by S&P Global Market Intelligence, shares of Helix Energy Solutions (HLX -0.10%) fell as much as 11.4%, Talos Energy (TALO -0.88%) was down 12.3%, Diamond Offshore (DO 2.30%) dropped 14.4%, and Transocean (RIG -0.92%) fell up to 14.4% this week. The stocks were down 10.3%, 11%, 7.8%, and 12.9% respectively at the market’s close for the week.

Oil’s big move

You can see the change in Brent crude’s price below, which is what pushed energy stocks lower. And the oil production and service companies are leveraged plays on oil, so it’s no surprise they were heavily impacted.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

What’s more curious is why the market was down in the first place. OPEC+ said it would extend 1.7 million barrels per day in voluntary production cuts expected to expire this year into 2025. A smaller group is cutting 2.2 million barrels per day through the end of the third quarter of this year.

A cut in production, although already in place, should push a commodity like oil higher, but it was the economic worry that had investors spooked. The thought is a slowing economy in China along with some signs of weakness in the U.S. and Europe could mean weaker demand, which would offset any cuts.

In general, oil markets would like an increased quantity of demand along with higher prices. But this week there were questions about the demand needed for the market and that impacted prices.

A step removed from oil prices

The reason oil service companies like Transocean, Diamond Offshore, and Helix Energy have been impacted so much is they need both strong prices and demand for higher quantities of oil to stay busy. This week’s move has put their long-term demand into question.

To make matters worse, all four companies have debt and aren’t reporting net income. Any decline in oil could negatively impact their ability to return to profitability.

HLX Total Long Term Debt (Quarterly) Chart

HLX Total Long Term Debt (Quarterly) data by YCharts

Given this chart, it’s easy to see why these leveraged oil plays were down big this week.

Where is oil going now?

It’s not unusual for oil prices to be volatile around OPEC+ decisions, but this move was unusual. There’s not a lot of evidence oil demand is going down and OPEC’s own Monthly Oil Market Report for May predicts a 2.25 million barrel per day increase in demand this year.

That should bode well for oil prices and a strong jobs report on Friday should bolster that bullishness. Investors may be disappointed this means interest rates will remain high, but it’s better to have demand for oil than a struggling economy.

I think this is a temporary move in oil and the economy will remain strong. In time, oil companies will profit from the market’s need for more energy.

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends Transocean and recommends the following options: long January 2025 $1 calls on Transocean. The Motley Fool has a disclosure policy.

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