Are We Heading For A Bull Market In Oil?

The collapse in the oil price has been the single most surprising financial event of the last year.

I don’t recall anybody predicting that oil would fall from more than $115 in July to below $50 within six months.

Goldman Sachs (which like everyone else failed to foresee the oil price rout) recently claimed it could hit $30 a barrel in an extended slump.

On Monday, oil leaped 8% to around $54 for a barrel of Brent Crude. Today, it touched $56.

Could we be staring at a bull market in oil?

What Goes Up… 

Two weeks ago, I wrote that the oil price had amazing recovery potential, as did explorers such as Premier Oil and Tullow Oil, and oil majors BP and Royal Dutch Shell.

I noted that energy companies were slashing jobs, cancelling projects, culling capex and abandoning frontiers, with the inevitable impact on supply.

That could quickly reverse the shale-fuelled supply glut that was largely behind the oil price drop.

Short Story

Friday’s oil price rebound was driven by a report from Baker Hughes showing a record weekly decline in the US oil rig count. In total, 24% of oil drilling rigs have been mothballed since the summer.

There were also signs of growing demand, with US motorists filling up on gas at $2 a gallon, and concerns over oil worker strikes in the US.

Short traders scrambled to close their positions fearing the oil price rout had come to an end.

Hopp In

I’ve been following developments on financial websites in oil-dependent Norway, where analysts are getting very excited about the oil ‘hopp’ of the last few days.

If you want to ‘hopp’ into oil stocks at today’s low prices, now could be a good opportunity.

BP is down nearly 15% since June, Royal Dutch Shell is down nearly 10%, while Premier Oil and Tullow Oil have each lost more than half their value.

They are rallying today, with all four between 2% and 8%.

Pump It Up

I certainly wouldn’t deter anybody from topping up their portfolio with oil price stocks at today’s prices.

But don’t get too excited. After recent sharp falls, some kind of bounce was inevitable, as short sellers pocketed their ample profits.

Energy futures specialists at Jefferies in New York have warned of a short-term, short-covering rally that could be quickly reversed.

Demand Shock?

Underlying sentiment remains bearish, with the market still heavily supplied. OPEC production rose in January to 30.37 million barrels per day, as producers battle to retain market share.

The global economic recovery also looks in doubt again, with that shock Q4 slowdown in US growth to 2.7% (down from 5% in Q3), a surprise decline in Chinese factory output, and the IMF downgrading its global growth forecast from 3.8% to 3.5%. Then there is Greece….

With BP and Shell both yielding more than 5%, you can pocket a juicy yield while you wait for the oil price recovery.

And there are plenty more FTSE 100 stocks paying income 5% or 6%.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.