The Premier Oil (LSE:PMO) share price is renowned for its volatility, and this year has seen the trend continue. Two major forces are affecting the price of PMO shares, namely reduced oil demand caused by the coronavirus pandemic and the fluctuating price of oil. In January, the PMO share price was trading above £1.18 but in March it came crashing down to a low of 12p. Since then it has increased by a whopping 188%.
Stabilising the price of oil
The price of oil is affected by supply and demand. While the pandemic has delivered a crushing blow to demand, the situation is expected to be temporary. Supply, on the other hand, is plentiful, but balancing the two is vital in stabilising the price of oil. OPEC+, an alliance of crude producers, has recently committed to the largest production cuts in its history, to match the drop in demand. While welcomed by many, it is a precarious balancing act to perfect.
Stabilising the crude oil price is vital to the survival of many independent oil companies such as PMO. But if the price of oil rises too quickly, the oil producers in America (who are not part of OPEC+) will go back online and production will increase again, rendering the OPEC+ cuts pointless.
The future outlook for oil prices
Uncertainty has divided opinion on the future outlook of oil prices. The Minister of Petroleum and Energy for Norway this week said there are signs that the market is stabilising more rapidly than expected a few months ago. This is positive news, particularly for the smaller exploration and production companies with lower liquidity and higher debt, such as PMO.
Meanwhile, the International Energy Agency’s June report states global demand for oil is set to fall at the fastest rate in history this year, before rebounding in 2021.
Should I buy Premier Oil shares?
Despite a 188% rise in three months, the PMO share price is now changing hands at a rate 60% lower than it was in January. Buying shares in Premier carries risk, just as any oil stock does, but the company has achieved a few positives lately that improve its future outlook. These include terms revised favourably for purchasing assets from BP, a reduction in the short sellers betting against the PMO stock price, and an extension expected to be applied to its debt maturity date.
When I previously covered the PMO share price, I noted that its survival is very much dependent on the long-term price of oil. This still stands, but the oil price appears to be stabilising around the $40 mark. Oil and gas production in the North Sea is rapidly declining. Once over-supply levels reduce, I believe the price of oil will skyrocket once more. It may not be this year, but I think it will happen.
PMO is an oil stock with a price-to-earnings ratio (P/E) of 3, which is exceptionally low, as the oil industry average P/E is 17. With its large debt pile, it makes sense that PMO is not paying a dividend. If you have an appetite for risk, then I think Premier Oil shares could be worth buying, but as further stock market volatility is likely, I would wait and buy on a dip.
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.