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Is now a good time to invest in oil?

29/07/2020

The coronavirus pandemic has had a devastating effect on the oil sector, with sources claiming that lockdowns and travel bans have wiped out nearly a third of the world’s global oil demand. Demand has been so low, in fact, that in April, US oil prices briefly turned negative for the first time in history.

So, what does this mean for the future of the oil sector, and is now a good time to invest?

The case for

In mid-June, EMEA head of oil and gas research at JP Morgan, Christyan Malek, stated that because of the cyclical nature of the oil industry, we could expect oil prices to rise to over $100 in the near future – and potentially even to $190 a barrel by 2025. When prices are low, as they currently are, the industry limits production to drive prices higher. When demand increases, prices are dropped, and so the cycle continues.

An article in Business Leader in late June described the oil industry as “beginning to display signs of re-growth”. It pointed to the resurgence of China’s industry and the increase in the country’s crude oil exports as two “factors inspiring most optimism”. The Motley Fool also points out that as lockdown restrictions ease, demand for oil products in multiple sectors and countries is beginning to regrow. In addition, Andrew Latham at Wood Mackenzie believes that oil will need further exploration: he states that just half of the oil needed between now and 2040 will be able to be drilled from existing fields.

The case against

However, not everybody is so optimistic. Lord Browne believes that oil demand will struggle to regain the upward directory that we have seen for so many years, suggesting that we could see more of a shift to renewable energy.

With global coronavirus cases still rising, the immediate outlook for oil is far from positive. In late July, Brent crude and WTI prices fell, with US consumption affected by the country’s surge in COVID-19 cases. However, Japanese factory data also shows the country’s lower economic activity continuing, which has impacted on oil prices.

The Motley Fool lists oil producers who are close to bankruptcy, and predicts that there are more to come during 2020. With such volatility and unpredictability in the market, some investors may feel that it makes sense to wait and gauge how likely recovery will be before investing.

Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.

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