What: Oil and gas stocks are enjoying a rally today thanks to a small rebound in the oil price overnight after it was revealed that US oil inventories were falling, albeit only slightly.
So what: The rise in the price of oil above US$60 a barrel has spurred gains in many ASX-listed stocks including Liquefied Natural Gas Ltd (ASX:LNG), Santos Ltd (ASX:STO) and Oil Search Limited (ASX:OSH). At lunchtime on Thursday these three stocks were up 10%, 6% and 5% respectively.
Now what: Many oil sector analysts believe the oil price could be headed even lower and as I showed here there is certainly an historical precedent that it could. These analysts are pointing towards an OPEC which is prepared to play 'hard-ball' with consumers. The analysts have suggested a testing of US$40 a barrel is not out of the question.
Investors need to be careful about chasing oil stocks higher in the current market as there will undoubtedly be bounces on the way down to establishing a cyclical low.
In other words today's gains could very quickly evaporate tomorrow which means it is important to firstly, take time in establishing a position and secondly, take a long-term approach whereby you buy stocks that you believe will be priced at meaningfully higher levels in a few years from now. This will allow you to sleep well at night even if prices decline further in the short term.