The shares of most companies in Australia’s energy sector are falling today and acting as a drag on the broader market upon fears that the recent rally may not be sustainable.

Investors have watched in awe as the oil price has surged higher in recent weeks. Of course, it remains well below the levels achieved in mid-2014 around US$110 a barrel or so, but at US$40.44 a barrel, it’s still a lot better than the sub-US$30 it was fetching earlier in the year.

But as inspiring as it may have been for some investors, others – myself included – have remained sceptical that the gains would be maintained in the medium run. The fact is there is still an enormous oversupply of oil in the global marketplace right now, whereby stockpiles (which are sitting at their highest level since 1930, according to The Australian Financial Review) will need to fall considerably before a rally can be believed.

Its recent rebound appears to have been sparked by two major factors, including the possibility of a lift in demand from China based on its ambitious target to grow its economy by 6.5% annually over the next five years. Oil is usually required to help build an economy, so investors had been hopeful this would help even out the supply and demand imbalance.

An even bigger factor, however, was the speculation that the world’s biggest producers could be meeting to agree to freeze output. A date of such a meeting remains uncertain, and it appears investors are becoming doubtful that an agreement will be reached – and if one is reached, whether it will make a significant difference.

Unfortunately for investors in the sector, analysts at Goldman Sachs think the rally is unsustainable as well. A rally would likely prompt further production, exacerbating the oversupply issue. So, according to CNBC, the Goldman analysts noted: “Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring.”

Thankfully, it believes that a rebalance is likely in the latter half of this year.

Until then however, shares in the energy sector seem like a dangerous bet. Shares of companies like Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO) and BHP Billiton Limited (ASX: BHP) are all trading lower today, and could continue to do so if oil prices keep falling.

There could well come a time to buy their shares in the future, but I personally think it would be too risky to do so today. At the very least, investors should ensure they don’t become overly exposed and that they maintain diversified portfolios at all times.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget BHP and Santos. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.