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Why Oil Stocks Are Soaring Today

What happened

The price of oil rebounded on Wednesday, with the U.S. benchmark West Texas intermediate (WTI) closing up more than 2%. That brought its price back above $50 a barrel, which is a key level for most producers.

That uptick in the crude oil market helped fuel a rally in most oil stocks. Several surged double digits at one point during the day, including Chesapeake Energy (NYSE: CHK), Denbury Resources (NYSE: DNR), Whiting Petroleum (NYSE: WLL), and Oasis Petroleum (NYSE: OAS).

Image source: Getty Images.

So what

The main factor fueling the rally in the price of oil was easing concerns surrounding the spread of the coronavirus in China. On top of that, crude oil got a boost from a decline in gasoline inventory levels in the U.S. and the expectation that OPEC might announce deeper production cuts to help offset the expected decline in Chinese oil demand due to the virus.

Several oil producers need the price of crude to stay well above $50 a barrel to provide them with the cash flow to support their operations as well as pay off debt. Because of that, the virus-driven slump in oil prices over the past few weeks has hit deeply indebted oil producers like Chesapeake, Denbury, Whiting, and Oasis hard. That quartet has each lost more than 25% of their value this year, even after accounting for today's rally. That's because investors are growing more concerned about their ability to operate, especially if oil continues slumping.

Given their weak financial state, each one of those companies has been looking to sell assets to bolster their balance sheet. Denbury, for example, agreed to a $50 million asset sale late last year to help boost its financial situation. Chesapeake, meanwhile, has reportedly been working on selling its Haynesville shale assets to a company controlled by the owner of the Dallas Cowboys.

Oasis Petroleum is also working on selling some assets. Just today, Bloomberg reported that the company was considering a sale of its MLP Oasis Midstream Partners (NYSE: OMP). Oasis owns a majority stake in the midstream company, which supports its operations in the Bakken Shale of North Dakota. A sale of that business would not only bring in cash but remove its associated debt from Oasis' balance sheet.

This year's slump in the price of oil has made it both more challenging for these companies to sell assets as well as a more pressing need. If crude oil doesn't stabilize, it could force financially weak oil companies to sell assets at fire-sale prices so they can stay afloat.

Now what

While oil prices are bouncing back today, it's not yet clear how much the virus will impact Chinese oil demand. According to a report by the Financial Times, the outbreak might dent demand in that country by 25% this month, which is more than 3% of global consumption. Because of that, crude prices could remain quite volatile in the coming days, which could cause these energy stocks to take another plunge.

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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.


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