Energy stocks have surged early in Monday's session after U.S. and global oil benchmarks rallied on Friday. Brent oil surged roughly 3.6% to US$61.38 a barrel while West Texas Intermediate (WTI) rose 4.4% to settle at US$56.52 a barrel.
The strong gains came after some traders took their profits on short positions on the commodity after oil prices tumbled to their lowest levels since early 2009. Oil prices have nearly halved since June as supply has continued to heavily exceed demand with no signs of a slowdown in production any time soon.
Indeed, the heavy falls have wreaked havoc on the energy sector and the stock market as a whole. While the bigger players such as BHP Billiton Limited (ASX: BHP) and Woodside Petroleum Limited (ASX: WPL) have taken a 19% and 9% dive since June respectively, some of the smaller players like Senex Energy Ltd (ASX: SXY) and Sundance Energy Australia Ltd (ASX: SEA) have been smashed down 56% and 57% respectively.
But there have been some positive signs over the last week. Some investors have taken the opportunity to swoop on stocks they believe may have been oversold with Senex Energy and Sundance Energy up 25% and 15% over the last week. They're up another 4.7% and 3.1% today while Santos Ltd (ASX: STO) and Liquefied Natural Gas Ltd (ASX: LNG) have also risen 4.3% and 8.8% respectively.
Should you buy?
Admittedly, there are some stocks in the energy sector which are trading at very compelling prices right now, and I've certainly been tempted to make a move. But investors need to remember that there are still enormous risks facing the sector.
While oil may have risen back above US$60 a barrel, there is every chance it could tumble much further. While some analysts are guessing it will fall to US$40, it could even go as low as US$20 a barrel which could prove catastrophic to some companies' share prices.
It's likely that with shares rising in the near term, some investors will attempt to sell into the strength which would, in turn, force prices lower again. That may be the time for investors to reconsider their options.
