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Why the oil price is set to recover and how to profit

by , 30 October 2015

It's no secret that the oil price has seen more than a year of lack lustre performance. Whilst many investors speculate on when the price will recover, one thing is certain, it will at some stage.

So when can you expect to see the oil price recover? And how can you profit from the oil industry?

Let's take a closer look…

The oil price could be back at $100 a barrel in 2017

Since June last year, the oil price started its decline. Now it’s hovering in the $40s, as you can see from the chart below…

Chart of the oil price over last three years

At the moment there are several factors putting pressure on the oil price:

  • US production is surging due to shale oil and fracking;
  • International production is increasing, especially from OPEC nations; and
  • Once Iran sees sanctions lifted, even more oil will come into the market.

Take the second quarter of this year, there was excess production of 2.3 million barrels per day. That’s a rise of 0.5 million barrels per day from the first quarter.

And there isn’t anything standing in the way of this surplus continuing into next year, Sean Brodrick in Investment U explains.

You can see this in the chart below.

Chart of oil consumption

The important thing to note is this build-up of inventory in oil is slowing. By next year, it’s forecast to fall to 0.8 million barrels per days.

There is another good sign for the oil price

Production is the US has peaked. In June it hit its highest level in 40 years. By this month, production is down 500,000 barrels per day, a large decline. And forecasts expect this fall to continue.

On the other hand, the Energy Information Administration (EIA) forecasts demand to rise next year. A lot of this demand will come from developing nations and the US will also increase its oil consumption.

The US is seeing a rise in the sale of petrol cars and a fall in the sale of electric vehicles.

Rising demand will eat into excess supplies and this will be good for the oil price. The EIA expects the oil price to start rising by the end of this year.

Since the downturn in the oil price, investments into oil projects has plummeted. This will affect supply too, which is also positive for the oil price.

Which oil producers should you invest in?

It’s uncertain when the oil price will start to recover, but if you’d rather wait take the time now to find oil producers that:

  • Pay substantial dividends;
  • Are increasing their dividends;
  • Have still made money and paid dividends with the oil price at its current levels.

So there you have it. Why the oil price is set to recover and how to profit.

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Why the oil price is set to recover and how to profit
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