It has been a rough few yearsfor FTSE 100 listed oil giants BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB), butsuddenly the downwards trend has reversed. Both stocks are up around 15% in the last week, driven by higher oil prices as Brent crude creeps above $50 a barrel. This offersmuch-needed respitefor investors, but it will come as a shock to those whoexpected prices to fall even further. Can it continue?
Oil bounced this week as Vladimir Putin ratcheted up tensions with his aggressive Syria intervention, and was given a further lift by as yet unsubstantiated rumours of Chinese stimulus. Russia is keen to open talks with OPEC over current high production levels, and with OPEC members hurting as well, they might be open to persuasion.
Yet a recovering oil price is far froma one-way bet. Latest figures show US crude inventories rising by 3.1 million barrels in recent weeks, suggesting that supplies remain high. Supply is only one side of the equation, however, and the US Energy Information Administration (EIA) recently forecast that demand in 2016 could rebound at the fastest rate for six years.
Iwould normally expect the oil price crash to have fuelleddemand but these arestrange times. TheEIA also noted that demand isdown year-on-year even though prices are$40 a barrel lower than12 months ago. Unless there are fresh reasons driving oil higher, the price recovery couldstall.
BP Or Not BP
I expected BP to be cheaper, given its troubles, butit trades at a forecast P/E of more than 16 times earnings, against a more reasonable 12 times at Shell. Both companies offer juicy dividends, yielding around 6.5%, and thoselooksafe enough fornow. Unlessthe oil price substantially recovers they could eventually prove too much of a drain on company resources.
If the IMF is right to scare everybody about an impending $3 trillion global crunch, then the oil price could struggle to make headway. Personally, I would be surprised to see oil anywhere neartodays lows this time next year, but, as we have seen, oil has a remarkable ability to surprise.
At least BP has now finally settled all major claims from the Gulf of Mexico oil spill, which gives investors a bit more clarity. Investors in Shell maybe reassured by chief executive Ben van Beurdens recent claim that the company is pulling out all the stops to safeguard its dividends and buy-back programme, and to keep its investment programme steady for the future.
At 387p and 1825p respectively, BP and Shell are both trading way below their 52-week highs of 487p and 2408p. They remain a recovery play even if you missed out on the latest rally. But there seems little need to panic buy. This weeks resurgence is welcome, but there isplenty more volatility to come.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.