The Oil Search Ltd (ASX: OSH) share price is on a tear this month, up 48% so far in November. And it's gaining again today, up 3% in afternoon trading.
November's price action will come as a relief to longer-term shareholders, who watched Oil Search's share price tumble 75% from 2 January through to the 23 March COVID-19 lows.
Despite November's strong performance, the Oil Search share price remains down 46% year-to-date.
By comparison, the S&P/ASX 200 (INDEXASX: XJO) is down 1% so far in 2020.
We'll look at what's driving November's gains below. But first…
What does Oil Search do?
Oil Search operates all of Papua New Guinea's oil fields. It owns 29% of the ExxonMobil-operated PNG LNG Project, a major exporter to Asian markets. The company also holds interests in the Elk-Antelope and P'nyang gas fields. And in 2018, Oil Search acquired and now operates a portfolio of oil leases in Alaska, United States.
Oil search counts some of the most successful oil and gas operators in the world as its joint venture partners. The company was established in Papua New Guinea in 1929, and shares first began trading in Australia in 1974.
Why is the Oil Search share price surging this month?
Several factors could be driving the Oil Search share price up this month. The company's 19 November announcement of a 33% increase in its contingent resources in its Alaskan Pikka oil field. The rising price of crude oil. And increasing expectations that crude prices could hold onto recent gains, or continue to climb higher.
As Ryan Fitzmaurice, commodities strategist at Rabobank, explains (quoted by Bloomberg):
The overall 'risk-on' sentiment is being driven by more positive vaccine news this weekend, and oil prices in particular are being propelled higher by aggressive 'short' covering, especially in the ICE Brent contract… The oil market will [also] be focused on the OPEC+ meeting which is set for next week and which will likely begin to garner a great deal of attention as the week goes on.
Brent crude prices kicked off November at US$37.46 per barrel. Today Brent is trading for US$46.55 per barrel, a price increase of 24%.
Oil Search's profits (and hence share price) are leveraged to the price of oil. Meaning when the price of oil goes up or down, the Oil Search share price is likely to rise and fall by a greater margin. That's because the company's fixed costs largely remain the same, regardless of the price of oil. So, any big increase, like the 24% price rise in November, lands almost entirely on the bottom line.
As Fitzmaurice points out, the next big determiner for the Oil Search share price will be the outlook for the global crude supply. We should know more about that following the upcoming OPEC+ meeting next week.
