Oil Prices Jump, Igniting a Short-Covering Rally (SM, DNR, CRC, CIE, OAS)

By Markets Fool.com

Image source: Getty Images.

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What: After hitting a two-month low yesterday, oil prices rebounded today, closing up more than 4.5%. That rally sent oil stocks surging, with heavily shorted producersSM Energy , Denbury Resources , California Resources , Cobalt International Energy , and Oasis Petroleum all up double-digits today:

SM Price data by YCharts.

So what: A bullish report from OPEC was the primary driver of today's rally in the oil market. This was after the cartel forecast that non-OPEC supplieswill fall by 880,000 barrels a day this year, which is 140,000 barrels per day deeper than its prior assessment. Further, it is projecting another 110,000-barrel decline in production next year, even as it expects oil demand to grow by 1.2 million barrels.

In addition to the bullish OPEC report, oil market traders believe tomorrow's U.S. inventory data will show a continued decline in crude supplies. That said, while the recent reports have shown stockpiles falling from their record highs of earlier this year, it also demonstrated a concerning trend in gasoline supplies. These conflicting trends suggest the country is still having trouble working off its oil glut.

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That said, at least for today, the oil market is bullish, which is fueling big rallies in mid-sized oil stocks. Most of this is likely short-covering given that traders are betting heavily against all five of today's big movers:

Oil Stock

Short % of Float

Shares Short

California Resources

22.08%

6.9 million

Cobalt International Energy

14.21%

36.9 million

Denbury Resources

20.07%

60.7 million

Oasis Petroleum

17.98%

28.1 million

SM Energy

22.07%

12.9 million

Data source: Yahoo! Finance.

This high short interest tends to lead to short covering rallies when prices rebound.

Now what: While OPEC's report is bullish, nothing fundamental has changed in the sector. That still hasn't stopped oil stocks with an elevated short interest from rallying sharply on today's bounce in crude. This move is just a continuation of the stomach-churning volatility that has been the norm in the sector for more than a year.

The article Oil Prices Jump, Igniting a Short-Covering Rally (SM, DNR, CRC, CIE, OAS) originally appeared on Fool.com.

Matt DiLallo owns shares of Denbury Resources. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.