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Is the Premier Oil (PMO) share price surge a dead-cat bounce after crashing 88%?

Oil stocks have had a miserable week since Russia dug its heels in and refused to conform to the OPEC+ plan for production cuts outlined last weekend. Coronavirus being labelled a pandemic and reduced forecast demand for oil further compounded the chaos.

In response to Russia’s stance, Saudi Arabia and the UAE slashed oil prices and pledged to increase production. It knocked the price of oil down 30% on Monday.

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The US and Saudi Arabia are sitting on a stockpile of oil. And many oil companies and countries have millions of barrels in storage around the world.

Unfortunately, this is not good news for the oil industry and many small independent oil companies are at risk of falling into administration.

Is Premier Oil on the edge?

Premier Oil (LSE: PMO) could be one of them, I feel, even though its shares have surged in Friday trading. 

Yesterday the Premier Oil share price saw a low of 12p, crashing 88% from over £1 a share less than three weeks ago. It’s had a ridiculous amount of debt for years but has been working on reducing it in recent times.

It also has some positive projects and acquisitions under way. And if this global crisis hadn’t come along, may well have continued to pay down debt and thrive.

That scenario doesn’t look likely any more, and shareholders are now looking at an uncertain future. Yesterday’s share price fall was in response to its largest creditor, Asian Research and Capital Management (ARCM), asking PMO to focus on its cash flow position and protect the balance sheet.

ARCM is a hedge fund that owns over 15% of Premier Oil’s debt. But it also holds a short position betting against 17% of the shares. This may seem a conflict of interest, but hedge funds mitigate risk, and this is how it’s sometimes done.

How precarious is Premier’s position?

Well, its forecasts are likely based on oil prices of $60-$70 for the next five years. But will it achieve this? 

Today Premier Oil said it’s identified potential savings of at least $100m on its 2020 capital spending plans, which has given some hope to investors, hence the price surge. 

But there’s no getting away from Covid-19 and the unpredictability of its spread is enhancing market volatility. And it could keep oil prices low.

Rystad Energy estimates global demand for oil was reduced by around 4 million bpd in February due to the coronavirus impact. Depending on how governments respond to the pandemic in the coming months, it could face further weakening.

Rystad also expects an increase in global oil supplies in the next quarter which could push oil prices into the low $20 range for the global market to rebalance. Low oil prices do not bode well for the shale industry, but Russia and Saudi Arabia may be determined to keep them low. Further escalating the international oil wars.

That’s also bad news for Premier Oil specifically. It will not recover from its current situation easily. Banks taking a lenient approach to its debt may well save it, or it may find backers. However, there are a lot of ifs around it and the scale of uncertainty is rising daily. The Premier oil share price has bounced 68% today, but I think this will be short-lived. It’s a very risky share, and one I’d avoid. 

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.