Tracy Salcedo of The Energy Report - Thu, May 26, 2016

Oil Climbs over $50: Can Investors Bank on a Recovery?

The price of a barrel of oil has almost doubled from its low of $28 at the start of the year, prompting speculation that a recovery is underway, which may result in the revival of companies in the exploration, production and services sectors that have foundered since prices collapsed in 2015.

Oil Graph

According to news reports published today (Thursday, May 26), the pop above $50/bbl can be attributed to a drop in supply. The U.S. Energy Information Administration's "Summary of Weekly Petroleum Data for the Week Ending May 20, 2016" notes that "U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.2 million barrels from the previous week."

Since breaking the mark the price has sunk below the $50 level, but hovers in the vicinity, as it has for the past few weeks.

Reuters reports neither Brent nor WTI has topped $50 per barrel since fall 2015.

Among the reasons for the drop in supply, the BBC cited wildfires in Canada, which affect oil sands production. Other factors include political unrest in Nigeria and increases in demand from China, India and Russia, disruptions that are "offsetting higher production from Iran and Saudi Arabia." The Wall Street Journal, in an article also published today, noted "a weaker US dollar" supported the boost in oil prices.

What does the news mean for investors in the energy sector? There is no clear answer, as reports caution that despite the rally, prices could remain volatile. Adam Laird of Hargreaves Lansdown is quoted by the BBC as saying, "It's too early to say this is the beginning of the big rebound."

The Wall Street Journal notes, for example, that while the jump "came with concerns that higher prices could just unlock more supply," some analysts see the move as a "psychological boost to a market that has been trading below that level for seven months now."

Goldman Sachs has said it expects "oil prices to consistently hit $50 a barrel in the second half of 2016 and $60 by the end of 2017," according to the BBC.

And from Reuters: "[S]ome market watchers say oil's climb to above $50 for the first time in seven months could spur producers, particularly U.S. shale drillers, to revive scrapped operations that could again bloat supplies and trigger a selloff." The BBC reported that producer Pioneer Resources is looking at increased rig counts at the $50 level.

Another factor will be the reaction of the Organization of Petroleum Exporting Countries (OPEC) to the oil price surge. Investors, Reuters notes, will be looking "for signs of a output hike now that oil had reached $50."

In an article published last week, Dr. Kent Moors of the Oil and Energy Investor observed that, while breaking through the $50/barrel ceiling garners the attention of "talking heads," he believes the more important takeaway is that oil prices may have established a new floor at $42/barrel.

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