The share price for Australian energy producer Oil Search Limited (ASX: OSH) is rising today and is currently sitting at $7.74, continuing what has been a strong month of share price gains.
Oil Search has been putting in solid gains since the beginning of September, when the Papua New Guinea government released the results of a review into the Papua LNG Gas Agreement. This review removed a pall of uncertainty that had been hanging over the Oil Search share price. However, since then we’ve seen a month of gains, and Oil Search shares are now approaching their previous highs, from before the issues in Papua New Guinea began. Can Oil Search’s share price rise continue from here, or will it soon stall?
Energy prices likely to rise
International events have conspired to support energy prices recently. The attack on Saudi Arabia’s main Abqaiq oil fields and the escalating tensions between the US and Iran.
On Sunday, the Wall Street Journal (WSJ) reported that it could be ‘many months’ before full-scale operations can be restored at Abqaiq. The WSJ quotes one Saudi official as stating: ‘We are still in a frantic search for spare parts. It is not really as great [and] rosy as you may think.’
All of this comes when, just a week before the attack, Saudi Arabia’s new Energy Minister Prince Abdulaziz bin Salman had been vocal of his support for the ‘OPEC+’ agreement, between the OPEC nations and other oil producers, to keep oil prices high. Prince Abdulaziz bin Salman could not have known about the terrorist attack that would soon hit his country’s oil infrastructure, but with Saudi Arabia committed to restricting supply before the event, its reserves may now struggle to compensate.
The OPEC members and other oil producing nations wanted higher oil prices, but now they could be set to get higher prices than they ever expected.
So why hasn’t oil risen further?
With oil supply likely to be so restricted for months to come, why are prices only slightly higher now than they were weeks ago?
The trouble is wider concerns for the global economy. The US–China trade war continues to drag on, Brexit uncertainty remains, and overnight we saw purchasing managers index reports from Europe telling a tale of downturn in Germany’s powerhouse manufacturing sector.
If the global economy stalls into a recession, slowed activity will see lower demand for oil. These concerns are likely the reason that oil prices haven’t shot up, despite geopolitical events that should be driving the price higher.
Then is Oil Search a buy today?
With a rising share price, a dividend yield just slightly above 2.5% and renewed security in its major projects, Oil Search looks like an excellent way to play rising energy prices. The only note of caution is the potential for it to drop rapidly in the case of a global economic recession, but it certainly wouldn’t be alone in that. So long as the global economy can continue to function, Oil Search looks like a good stock to own.
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Motley Fool contributor Tyler Jefferson does not own any shares in the companies 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 Scott Phillips.
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