Oil prices surged higher overnight, recording their strongest three-day rally in more than two decades.
The resource has been stuck in a rut over the last year or so and recently dipped below US$40 a barrel for the first time since early 2009. Indeed, the fear has been widespread regarding a dive in global demand – largely due to the slowdown in China – combined with a flood of supplies from the United States and members of the Organisation of Petroleum Exporting Countries, or OPEC.
However, those fears appear to have been allayed over the last few days, in a substantial way. Brent crude, which is the global benchmark, soared 7.3% to US$53.54 a barrel, while US crude rallied 8.8% to settle at US$49.20 a barrel overnight.
According to The Wall Street Journal, that took the resource's three-day gain to 27.5%. Not only does that place it in an official bull market – defined as a rise of 20% or more since its low – it also marks the resource's biggest three-day rally since August 1990 in terms of percentage gained. In dollar terms, it was the biggest three-day gain since early 2011.
So what caused the rally? I hear you ask…
There are a few factors that could have contributed to the sudden upswing.
One of these factors was a downward revision of U.S. oil output by the Energy Information Administration, or the EIA. The EIA reduced its production estimate from January to May to 9.4 million barrels a day, down from its prior estimate of 9.5 million barrels a day. Indeed, energy producers in the U.S. (as is the case throughout the rest of the world) have clearly been impacted by falling oil prices which has made some projects unprofitable, or else uneconomic to pursue.
Another factor was indications that OPEC may change its stance in the near future, and be willing to cut its own output which would likely have a very positive impact on oil prices.
The sudden rebound in oil prices will no doubt generate some interest in Australia's energy and gas sector. This is especially the case with companies like Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY) and Woodside Petroleum Limited (ASX: WPL) all trading near multi-year lows – not to mention BHP Billiton Limited (ASX: BHP), which is currently offering a dividend yield close to 10% (when franking credits are included).
Before investors become too confident however, they need to remember that each of these companies is susceptible to further weakness in the oil price, while many could also feel the pinch financially.
As my colleague Sean O'Neill said yesterday, there is still significant uncertainty in the sector. While that doesn't necessarily mean investors should stay away altogether, it is vital that they spread their risk and be prepared to endure a loss if conditions do worsen.
