With hurricanes Harvey and Irma now in the rearview mirror, this week the oil industry turned its attention back to market fundamentals. Traders liked what they saw as increasing confidence in OPEC's cuts and signs that U.S. shale drillers are slowing down. The combination helped drive oil up about 5% this week to around $50 per barrel, which was its biggest weekly gain since July.
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That rising crude price was more than enough to fuel a rally in the oil market. According to data from S&P Global Market Intelligence, drillers and frack sand producers led the way, with several jumping more than 15% this week.
Leading the charge higher were Carrizo Oil & Gas (NASDAQ: CRZO) and W&T Offshore (NYSE: WTI), which jumped 20% and 26%, respectively. Both oil stocks are coming off some minor disruptions from Hurricane Harvey on their operations along the Gulf Coast. However, W&T Offshore noted that it experienced "relatively minor impacts" from the storm. That's primarily because the company had proactively shut in some production that was in the path of the hurricane, which ultimately resulted in the deferral of 43,000 barrels of oil equivalent production. Aside from that, it had no material damage to its platforms in the Gulf of Mexico. Meanwhile, Carrizo Oil & Gas suspended its drilling and completion operations in the Eagle Ford shale during the storm, but its crews returned to work shortly after it passed. And while downtime at midstream facilities and refineries will temporarily reduce Carrizo's sales volume, that's a minor bump in the road. In a sense, the temporary production setbacks will be beneficial since last week's rise in oil prices means Carrizo and W&T could make more money on the deferred output.
Bakken-shale-focused driller Whiting Petroleum (NYSE: WLL) also surged this week, rallying nearly 19%. That rebound came despite a downgrade from Morgan Stanley, which cut Whiting from underweight to equal weight, citing a weaker risk-reward profile relative to competitors that operate in the faster-growing Permian Basin. While drillers in the Permian can earn higher returns at current prices, thus being able to reach a more rapid growth rate, investors saw crude's move back toward the $50-a-barrel range as a huge positive for Whiting, given that it needs oil at that level to sustain its operations. Recent industry data suggests that fundamentals are improving, and so some of the weight that has been holding down Whiting's stock is gone.
Finally, frack sand producers Hi-Crush Partners (NYSE: HCLP) and Emerge Energy Services (NYSE: EMES) ended the week on a high note, rallying 15% and 19%, respectively. With oil moving back near $50 a barrel, shale drillers probably won't need to make deeper cuts to their capital budgets, which would have further slowed industry activity. Instead, drillers are more likely to stay on track with their plans, which should stimulate demand for sand. That would prop up volumes and prices, which is good for the bottom line of both Hi-Crush Partners and Emerge Energy Services.
Despite rallying sharply this week, all five of these companies still face an uphill battle since each need higher crude prices to thrive. While this week's rally in crude suggests that oil could be turning a corner, there's been enough head fakes over the past few years that should give investors reason to pause. Chasing after these oil stocks isn't a wise idea since they could quickly give back their gains if crude changes course again. Instead, investors are better off focusing on the lowest-cost producers, as they can still thrive even if crude re-enters the slump.
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