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Is it time to take a punt on oil producers?

Oil prices rallied to a 4-month high in mid-April as more signs emerge that oil demand and supply are getting closer to each other.

Prices are still volatile though, with Brent crude sinking 2.4% overnight to US$44.69 a barrel. According to Bloomberg though, oil prices have risen to US$45.08 a barrel, and the chart below shows the recovery from sub-US$30 a barrel prices in January 2016.

oil prices

Source: Bloomberg

Declining US output is accelerating as more shale oil producers are shoved out of the market, unable to operate profitably at current prices. Ongoing disruptions in Nigeria, the United Arab Emirates and Iraq have more than offset increasing production from Iran and Angola, so OPEC production is falling slightly.

At the same time, steady demand growth continues, particularly in India, although demand in China, the US and Europe is decelerating, according to the International Energy Agency (IEA).

For Australia’s largest oil producers including BHP Billiton Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) that should be good news.

BHP appears to have already anticipated a stronger oil price, recently announcing that it was increasing its capital expenditure on drilling and exploration by US$640 million.

Kerr Neilson, billionaire and founder of Platinum Asset Management Limited (ASX: PTM) has also stated that the fund manager is betting on ‘the eventual recovery in the oil price’. When asked why, he said, “traditionally, this type of unambiguous negativism has led to great returns.”

Foolish takeaway

With oil and gas producers’ share prices down as much as 40% (Santos) or 55% (Origin) over the past year, now might be a good time to jump on board – for those with steel stomachs that is. The ride is likely to be very bumpy.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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