Oil companies are some of the big winners today on the ASX. At time of writing, Oil Search Ltd [ASX:OSH] is up 5.50%, Woodside Petroleum Ltd [ASX:WPL] has increased by 4.90% and Santos Ltd [ASX:STO] is up by over 4%.
The main reason for the move is higher oil prices. Overnight the Brent crude clocked a 1.3% gain while West Texas Intermediate (WTI) increased by 1.3%.
Oil prices have been in recovery mode so far this year
The surge in oil prices we’ve seen today is mainly because US crude oil stockpiles are lower than expected.
As OilPrice.com reported:
‘The American Petroleum Institute (API) reported on Tuesday a draw in crude oil inventories of 5.821 million barrels for the week ending January 8.
‘Analysts had predicted an inventory draw of 2.266 million barrels for the week.
In the previous week, the API reported a draw in oil inventories of 1.663-million barrels, after analysts had predicted a draw of 1.271 million barrels.’
But oil prices have been climbing since the beginning of the year. At time of writing, WTI is trading at US$53.69 a barrel and Brent crude is at US$57.16. This is 11% higher for both year-to-date, with prices at levels similar to last February, well before the lockdowns.
The recovery mostly has to do with supply…or lack thereof.
Oil producers have been keeping a lid on supply. Earlier this year Saudi agreed to cut one million barrels of oil per day, or about 1% of global supply, in February and March from January levels. Oil prices have been on the upswing since.
What could happen next?
Lower supply is putting floor on oil prices, at least in the short term. Especially as demand decreases with Europe going into more lockdowns as the virus keeps rising, but also an outbreak in China, who is the largest oil importer in the world.
Higher oil prices are also good news for US shale that has been struggling with low oil prices and cutting costs.
But while oil prices are enjoying a sudden boost, it sure doesn’t look like they will be moving much to the upside with more lockdowns on the way.
It’s why we think there are better investments out there, especially if you’re looking for dividend plays.
Check out Editor Greg Canavan’s free report ‘Five Dividend Stocks set to Thrive in the Post-Pandemic Era’.
You can access it here.