Oilisup 44% since Brent crude hit a low of $27 a barrel in January, to reach $38.93 at time of writing. FTSE 100-listed oil giantRoyal Dutch Shell (LSE: RDSB) has rallied with it, its share price up33% since mid-January, from a low of 1277p to todays 1709p. BP (LSE: BP) is a more troubled beastand its share price growth has been less spectacular, risingjust 5.5% from its January low of 328p to 346p today.
All tomorrows parties
The oil recovery has stumbled, with the pricerecently hitting a one-month lowashedge funds cut their net long position. So is the party over before it started swinging?
Latest oil futures suggest there could be more to come, rising on a flashof bullishness from US Federal Reserve chair Janet Yellenand positive German domestic growth data. Hopes are also rising thatOPEC and non-OPEC members will agree to cap output in Doha on 17 April, but I suspect those hopes will be dashed.
Iran aims to pump 4m barrels a day next March for the first time since 2008. Its keento resume its mantle as OPECs second biggest exporter, overtaking Iraq, and wontfreeze output until it hits its goal. Saudi Arabia wont freeze if Iran wont. Russia has hinted that it might accept a freeze, butnobody trusts it to stick to any deal. All the other oil producers need the money too much to risk losing market share. Right now,theyre merely talking the price higher.
Summer lovin
Oil could nonetheless rise. I could see it hitting $50 over the summer, although I cantimagine it climbinghigher without OPEC help. Shale is unlikely to trash the party yet:Goldman Sachs reckons oil needs to hitat least $70 to give USinvestorsa second wind. Global oil supply seems likely to remain high, with Russia pumping at a 30-year high and the US producing 10m barrels a day, second only to Saudi. But the pricefelltoo low and must revertat some point. Demand is rising andcould swallow excess production. The current pause may just be a staging post in the recovery.
If Im right, now could be a good time to buy into BP and Shell. Youll never find the perfect time (you missed it with Shell in January, bad luck) but this looks like a good time to build a long-termposition. Oil will surely be higher in one years time. BP needs the priceto hit $60 to secureits dividend, which may explain why its recovery is so less impressive than Shells.
Of the two, Shell has been my preferred option for several years. It has a prouderdividend history thanBP and management will fight tooth and nail to defend todays payout, which yields a fabulous 7.28%. Trading at7.8 times earnings, Shellsprice reflects some of the risk. You have to accept that both dividends are a risk. But if theyre cut, and the share price falls further, that could be your next opportunity tobuy more stock.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.