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Why Oil Stocks Are Getting Crushed Today

Matthew DiLallo, The Motley Fool

What happened

Oil prices sold off on Thursday, plunging nearly 8% on the day. That shellacking sent most oil stocks tumbling. Leading the downdraft were Chesapeake Energy (NYSE: CHK), Denbury Resources (NYSE: DNR), Parsley Energy (NYSE: PE), WPX Energy (NYSE: WPX), and Callon Petroleum (NYSE: CPE), each of which fell at least 10% by 2:30 p.m. EDT on Thursday.

In addition to slumping crude prices, disappointing earnings reports in the sector also weighed on oil stocks.

So what

Oil prices, along with the broader stock market, fell off a cliff after President Donald Trump tweeted that he would impose new tariffs on Chinese goods starting next month. That fueled worries of an escalating trade war between the two countries, which could cause a global economic slowdown. Given that recessions typically sap oil demand, crude prices tumbled on worries that consumption growth will slow.

The word Oil on a display board with a red down arrow next to it.

Image source: Getty Images.

While the sell-off in oil prices weighed on most oil stocks, it hit shares of financially weaker oil producers the hardest. That's why companies like Chesapeake Energy and Denbury Resources tumbled today. Both companies need higher oil prices so they can generate more cash to continue chipping away at their debt loads. When crude falls, it increases producers' concerns that they might never dig out from under their massive debts.

In addition to the pressure from falling oil prices, several Permian Basin-focused drillers plunged due to the weak results of regional leader Concho Resources. That company's shares cratered after it missed earnings expectations and revised its full-year guidance; it struggled not only with lower oil prices, but also with some infrastructure constraints. That made investors increasingly concerned that smaller peers like Parsley Energy, WPX Energy, and Callon Petroleum would be struggling with the same issues during the quarter. If that's the case, those companies are also likely to need to adjust their 2019 game plans, so they can navigate through the region's issues.

Now what

This isn't the first time that crude prices moved on a tweet from Trump. However, what has the market spooked is that his growing threats to add new tariffs could soften demand for oil. That could put more pressure on crude prices in the coming months. With companies like Denbury and Chesapeake already struggling to keep their heads above water, they'd be under even more pressure if crude continued to fall.

Meanwhile, the continued volatility in the oil market, combined with regional infrastructure issues, will likely force drillers in the Permian Basin to rethink their growth plans. If the sector announces additional activity reductions, it could cause even more volatility, since the Permian was the one place where investors expected growth.

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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.

This article was originally published on Fool.com