Oil prices rallied to their highest point of 2015 overnight based on encouraging signs that US production may finally be peaking, thus providing some relief in a market that has become oversupplied.
Data provided by the US Energy Information Administration (EIA) showed that the nation's oil output declined last week for the second time in three weeks. Meanwhile, although US crude inventories hit a record level for the fourteenth consecutive week, inventories rose by just 1.3 million barrels which is much lower than what some analysts expected.
As a result, oil prices rose strongly for the fifth straight session overnight. Brent crude rose 3.2% to US$60.32 a barrel, while West Texas Intermediate (WTI) rose 5.8% to US$56.39 a barrel, its highest price so far this year.
The rapid increase in production from the United States has played a key role in driving oil prices lower over the last 12 months. While global demand has remained low, the US and Organisation of Petroleum Exporting Countries (OPEC) have been locked in a price war with no party willing to sacrifice market share to support prices, thus resulting in an oversupply within the market. Some estimates suggest that the current excess supply could be around 2 million barrels per day.
Following the closure of several hundred oil rigs around the US however, it appears that production could finally be coming under control which could see prices rebound in the coming months. Some analysts have even forecast it will be trading above US$70 a barrel by the end of the year.
Australian investors have seized on the news with plenty seeing bargains in the energy sector. Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) have risen 1.2% and 3.8% respectively, while AWE Limited (ASX: AWE), Senex Energy Ltd (ASX: SXY) and Sundance Energy Australia Ltd (ASX: SEA) are up 8.7%, 6.2% and 5.9% each. BHP Billiton Limited (ASX: BHP) is also up 2.4%.
While there are certainly some encouraging signs for the energy sector, investors could look to gain some exposure. However, it is important to also remember the risks involved with such an investment, and therefore only invest what you can comfortably afford to lose should prices take another dive.
