Has the price of oil bottomed out?

Credit: drpepperscott

According to the most recent report from the International Energy Agency (IEA), the oil market could have reached its bottom in April as demand grows and oversupply dries up. This has big implications for the share prices of Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH), and Santos Ltd (ASX: STO), whose prices have been hammered over the past 12 months.

The IEA reported recently that declines in US shale gas volume and stagnating Middle Eastern production combined with rising demand has eased the global oversupply of oil. Despite an increase in global oil inventories and floating storage, the declining supply situation is believed to be behind the rise of oil to recent levels of around US$44 per barrel.

Recent rises in oil prices are unlikely to have a significant impact on any of the above-mentioned companies’ earnings, although the potential for further rises should not be overlooked. At today’s prices, major deferred projects are still unlikely to be restarted – limiting potential growth – although acquisition activity could remain elevated.

Supply matches up with demand

According to the IEA’s figures, demand and supply are much more tightly matched than they were when oil prices started sliding. This is potentially a catalyst for higher prices, and investors like Platinum Asset Management Limited (ASX: PTM) have recently been betting on a price recovery.

However, the IEA has also been reporting that demand growth has been slowing in line with global markets in China and Europe particularly, while India’s demand could accelerate. With the International Monetary Fund (IMF) still revising its growth projections downwards, oil demand could be set to slow further – again placing pressure on prices if supply begins to increase.

While conditions in the oil market appear more favourable than they have ever since prices began falling, investors also need to be aware that prices of US$100/barrel might not be coming back any time soon.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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