Brent crude has moved back beyond the $70 (£53.5)-a-barrel mark, lifting shares in producing oil and gas stocks on investor expectations of widening profit margins. Supply disruption in Libya, cuts by Opec and a further deterioration in Venezuelan output have all contributed to a tightening market, which has seen the key international benchmark rebound 40 per cent since Christmas.
The rally follows a sharp fall in prices in the last three months of 2018, when concerns about US oversupply and a wavering global economy saw Brent drop 42 per cent to $50 a barrel.
Now, with prices back up, the world’s swing producer – the US shale industry – is back to generating much-needed free cash flow. For supermajors such as BP (BP.) and Royal Dutch Shell (RDSB), the run-up in prices looks set to boost first-quarter earnings and cover cash returns, and the shares are up 13 and 6 per cent, respectively, so far in 2019. The effect has been more pronounced on the share prices of leveraged plays including Premier Oil (PMO), Enquest (ENQ) and Tullow Oil (TLW), which will be using higher prices to reduce their debt piles.
Where prices head next rests on a couple of key factors. Self-appointed consumer watchdog (and US president) Donald Trump has again started to sound the alarm about price creep, taking to Twitter on 28 March to ask Opec to "increase the flow of oil".
But Saudi Arabia, whose state-owned oil firm Saudi Aramco has been holding a roadshow for a bond issue it says it does not need, has recently overseen a series of supply cuts by the cartel.
Per Magnus Nysveen, head of analysis at oil consultancy Rystad Energy, also believes Aramco’s purchase of Saudi petrochemicals group Sabic is a clear sign that the de facto Opec leader wants to secure demand rather than increase spare production capacity. In other words, Saudi Arabia appears to be opting for price over volume in the near term.
Support from other international suppliers has not helped much. Bloomberg data suggests Venezuela’s production has now fallen below 900,000 barrels of crude per day, a drop of more than 60 per cent in the past three years. Iranian crude supply has also dropped by more than a million barrels a day since last summer, when it became clear that the US would reimpose sanctions against the Islamic Republic.
