Investors in Australia's energy sector will no doubt be encouraged by another jump in oil prices on Friday which supported what was the resource's fourth straight week of gains.
Brent crude, which is the global benchmark, rose US$1.30 to US$57.87 a barrel as the markets became more comfortable that an agreement on Iran's nuclear program would not result in a huge injection of oil supplies to the global market. Investors had feared that 30 million barrels of Iranian oil could be released into an already saturated market should an agreement have been reached.
Meanwhile, West Texas Intermediate (WTI) crude, which is the US benchmark, rose 85 cents to US$51.64 a barrel. The WTI contract has risen almost 15% over the last month upon signs that the closure of several hundred oil rigs could finally be taking its toll on production, with some pundits even suggesting oil prices could rise back to US$75 a tonne – a 45% improvement on today's price.
Should you buy?
Oil prices have been extremely volatile over the last 10 months or so. In that time, Brent crude and WTI crude have both roughly halved in value as a result of a massive oversupply globally, combined with declining demand.
According to a report by oil field services firm Baker Hughes, the number of rigs drilling for oil in the US fell by another 42 to just 760 last week – the biggest decline in four weeks. As this number continues to fall, production should (theoretically) begin to taper off which would of course be great for oil prices.
Unfortunately, there is no guarantee of that happening. Prices could just as easily retreat further which could be catastrophic for some of Australia's high-cost producers (and their shareholders), but it is clear that investors are becoming more confident. While the more risk-averse investors should continue to avoid the sector altogether, those who are more confident could consider investing in big-name companies such as Santos Ltd (ASX: STO) or Woodside Petroleum Limited (ASX: WPL), while Senex Energy Ltd (ASX: SXY) could also generate solid returns should oil prices surge.
Indeed, it is vital to remember to only invest what you can comfortably afford to lose. As mentioned above, the sector remains incredibly volatile which could see share prices fall considerably further from their current levels.
