What Investors Need To Know About Oil’s Strong Recovery In Recent Months

Oil prices had increased significantly from less than US$30 per barrel earlier this year to cross the US$50 mark a few days ago.

Would this prevail in the long-term? After all, there were no lack of analysts who predicted oil to fall to US$10 or US$20 per barrel back in January.

One of the main reasons cited by analysts for lower oil prices is that there’s an oversupply of oil. But this may be wrong.

In fact, a recent report by a respected UK oil research firm, Wood MacKenzie, predicted that the world will experience a net shortfall of 4.5 million barrels of oil per day by 2035 if current downward trends in oil exploration results continue.

In the shorter term, there are also significant oil supply constraints due to the following disruptions in oil producing countries:

  1. Canadian wildfire
  2. Violence in Nigeria and Venezuela
  3. Continued oil bankruptcies in the United States

While Canada may find it challenging to bring under control the wildfires it’s experiencing now – covering some 2,000 square miles  – it expects progress in June.

The same cannot be said of the Nigeria situation. Africa’s largest oil producer saw its production levels drop to a 22-year low this month as militants blew up oil facilities. Meanwhile, Venezuela is suffering from the lack of food, medicine, and electricity. The resulting violence is forcing down oil production in the country.

As for the US, there have been at least 18 US oil companies filing for bankruptcy in the last two months. Deloitte also recently estimated that one-third of US oil producers might file for bankruptcy this year. In general, US oil companies require oil prices to hit US$75 before they can resume normal operations. With oil currently hovering around the US$50 level, there’s still a long way to go.

There are many companies in Singapore’s stock market with huge exposure to the oil & gas industry. Some of the bigger companies in the space include Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat doesn't own shares in any companies mentioned.