Wednesday was generally an up day on Wall Street, with investors feeling relatively comfortable about how 2020 is likely to end for the stock market. Congress passed stimulus legislation to send $600 checks to hundreds of millions of Americans, and although threats from the White House to veto that legislation have made some people uncertain about what the future will bring, most seem to believe that the American public will get the help they need in the end. As of 11 a.m. EST, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 174 points to 30,189. The S&P 500 (SNPINDEX:^GSPC) gained 16 points to 3,704, and the Nasdaq Composite (NASDAQINDEX:^IXIC) settled for a gain of just 6 points to 12,814.
Investors have paid a lot of attention to hot areas like technology and specialty niche industries like electric vehicles. But Wednesday morning, you could find many of the top performers for the day in the energy sector, which has suffered dramatically during 2020 but could be poised for a comeback.
Big gains for E&P players
Some of the top performers in energy came from the exploration and production side of the business. Occidental Petroleum (NYSE:OXY) was up 6% at mid-morning, while Diamondback Energy (NASDAQ:FANG)Â gained almost 10%. Smaller players like Continental Resources (NYSE:CLR), Devon Energy (NYSE:DVN), and Marathon Oil (NYSE:MRO) weighed in with gains of 5% to 6%.
The obvious reason for the uptick in energy stock prices was a corresponding gain in prices in the oil patch. Crude oil prices climbed $1 per barrel on Wednesday morning, topping the $48-per-barrel mark. Spot crude prices are essentially at their best levels since February, before the full extent of the COVID-19 pandemic was evident.
In part, weather-related issues are helping the energy markets. During the winter months, cold spells can push prices higher, especially in the natural gas and heating oil markets.
Will the bounce last?
The problem energy stocks face is that there’s a host of factors weighing against them:
- Inventories of crude oil have been on the rise. In the week ending Dec. 18, inventories rose 2.7 million barrels, with most analysts having expected declines of 3.1 million barrels.
- Worries about a new strain of the coronavirus could cause countries around the world to reimpose lockdowns, which in turn could cause a repeat of the plunge in demand that oil markets saw earlier this year.
- Oil-producing companies have done their best to stabilize their economies in the face of low prices, but even brief upticks like the recent one put pressure on OPEC and other oil-rich nations to consider boosting production to rebuild financial reserves.
Yet energy companies are doing their best to fight through tough conditions. Occidental, for instance, is aggressively buying back some of its short-term bonds as part of its efforts to restructure its overall debt. That’s been an issue for many E&P specialists, which took on leverage when oil prices were higher and then found themselves struggling to maintain their debt and find refinancing opportunities as it matured.
Expect a rocky road for energy
Value investors like the idea of picking the most beaten-down industries and betting on a turnaround. For energy stocks, however, the recent rebound in share prices is vulnerable to all sorts of possible bad news in the near future. Investors should tread carefully to make sure they understand all the risks before venturing into the sector.