What a difference a week makes. The energy price crash of the last year has hammered smaller oil explorers who need the cash to keep flowing to fund their development products.
Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW) have been hit harder than most, their share prices plummeting by up to 75% over the last 12 months.
Both companies have been forced to jump through hoops to reassure investors that their capital debt structures are in good order, and can withstand a sustained period of $50 a barrel oil price or less.
Nerves were temporarily soothed but it was still clear that at some point oil had to rise again, to make their sums add up.
Roll Out The Barrel
And last week, sentiment finally changed. Maybe oil had been too cheap for too long, making markets receptive to a different narrative.
The rumoured Chinese stimulus package revived spirits, although we are still waiting to see what that entails. The “bad news is good news” market reflex helped, as poor data puts the supposedly imminent US and UK rate hike on the back burner once again.
European Central Bank easing may also have played a part in oil’s recovery. As did the American Petroleum Institute’s weekly inventory report showed a drop of 1.2m barrels last week for crude.
There are other reasons to think that the oil price recovery could have wheels. Vladimir Putin’s manoeuvres in Syria will only inflame tensions in the world’s oil producing heartlands, while it also appears that US shale production has finally been squeezed by the aggressive Saudi price collapse strategy.
China Syndrome
Where the oil price goes, Premier and Tullow’s share prices follow. Their share prices are up 34% and 38% respectively over the past week, rewarding brave contrarians. Both stocks are a geared play on pricier oil and that gamble has paid off for now, but can it keep reaping the rewards?
More expensive oil isn’t a one-way bet. China might get its stimulus package but demand from that quarter may continue to fall as the growth story continues to slow. In any case, the extra liquidity could mostly be used to service existing company debt rather than being put to productive work.
Wildcat shale drillers are squealing at these prices but some may start purring again if oil continues to rise. Supply is still strong, despite the slip in oil inventories. Iranian oil has yet to hit the market.
Long Road Ahead
There is also a chance that the oil price rebound will unwind next week. Some profit-taking is likely and we live in volatile times. So tread carefully and don’t get carried away.
Oil is still too important to the world economy to stay cheap forever, and could surge when Saudi finally tires of its pricing tricks. The US Energy Information Administration (EIA) expects demand to rise by 270,000 bpd to 95.2 million next year, amid stronger projections for Chinese demand growth. The oil cycle may now have passed its low.
Premier Oil and Tullow Oil need oil to rise to at least $60 or $70 a barrel to stay profitable in the long term. At time of writing, Brent Crude trades at $52.65. There is still some way to go, but the journey to pricier oil could finally have started.