Why Oil Stocks Are Falling Back Down to Earth Today

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What happened

Oil prices are cooling off today after Monday’s historic rally. Crude was down about 5% at 10:45 a.m. EDT on Tuesday, after spiking 15% on Monday, which caused oil stocks to go ballistic.

Unsurprisingly, today’s decline in the price of crude is causing energy stocks to give back some of those gains. Among those hardest hit were California Resources (NYSE: CRC), Denbury Resources (NYSE: DNR), Whiting Petroleum (NYSE: WLL), Chesapeake Energy (NYSE: CHK), and Continental Resources (NYSE: CLR).

The word oil with a red down arrow next to it.

Image source: Getty Images.

So what

The price of oil is falling today on a report that Saudi Arabia expects to quickly get its production back on line. Drone attacks over the weekend knocked more than half the country’s oil output off line — about 5.7 million barrels per day. The country is close to restoring about 70% of that supply. Meanwhile, it believes it can have the rest on line within the next two to three weeks. That’s much quicker than the initial fears that it could take months to bring back the bulk of its disrupted supply. And the market should be able to easily cover the short-term supply gap with the oil it has in storage.

With crude prices falling, oil stocks are giving back some of Monday’s gains. Whiting Petroleum, for example, rocketed 48% yesterday as surging crude prices fueled optimism that the company would make more money, which it could use to pay down debt. But now that it’s less likely that prices will keep rising, it’s giving back some of those gains, slumping 16% today.

California Resources, Denbury Resources, and Chesapeake Energy, likewise, are giving back some of Monday’s gains for the same reason. California Resources, which surged 38% yesterday, is down about 14% today. Meanwhile, Denbury, which spiked 29% on Monday, has slumped roughly 10% today. Chesapeake Energy was up almost 16% yesterday but is also down about 10% today.

Again, investors were optimistic that these producers would be able to ride the wave of higher oil prices to generate more cash. That would enable them to pay off a bigger chunk of their large debt loads. In Denbury’s case, each $5 change in crude prices affects its annual cash flow by $100 million. As such, yesterday’s spike could have been a needle-mover for the company if crude remained at that level, since it would have more money to tackle its $2.5 billion debt problem. But with crude prices falling, the company might not produce as much cash as investors had hoped.

Continental Resources also had a big day on Monday, surging almost 20%. That rally made the company’s founder and CEO richer by $2 billion thanks to his 77% stake in the company. With the oil company’s stock falling nearly 11% today, his net worth is taking a hit.

Now what

Oil prices spiked yesterday due to uncertainty about when Saudi Arabia would restore its production levels. That caused investors to become overly optimistic that oil prices could have further to run, so they bid up oil stock prices. With that country’s output disruption likely only a short-term issue, the market is repricing crude oil. That’s deflating oil stock investors who had hoped that a long-term outage could boost the fortunes of weaker producers.

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Matthew DiLallo owns shares of Denbury Resources. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.