Will oil be the “Trade of the Year” in 2016?

Oil prices surged higher again on Friday, adding to the market’s confidence that the rout may have finally found a floor.

After hitting a 12-year low price around US$27 a barrel recently, Brent oil is now fetching more than US$32 a barrel following a 10% rally. US crude oil also gained 9% to trade at US$32.19 a barrel, resulting in a 21% gain over just two days, according to The Australian Financial Review. It’s the biggest two-day gain since September 2008.

While some pundits recently noted that oil prices could fall as low as US$10 before a floor was found, others are now suggesting oil prices will actually end the year higher. The AFR even noted that Pierre Andurand, who correctly predicted the slump in oil prices, believes it will trade for US$50 a barrel this year and US$70 a barrel next year.

Indeed, the rout itself has been caused by massive oversupply in the market, combined with a lack of demand growth. These low prices could force some of the higher-cost producers to cease production however, which could see surplus turn into a deficit.

Although there is every chance those suggestions could be wrong, and that oil prices could well fall below their current levels, investors do appear more confident. Shares in the sector jumped on Friday and are surging again today, driving the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) higher:

Shares across the sector have fallen considerably in price over the last 16 months or so, and the latest bout of optimism is sure to attract some investors back into the sector. While that might be a strategy for investors willing to take a high amount of risk, others should look to avoid the sector for a while yet.

Buying shares in the sector today is really taking a bet on the future of oil prices. It’s a bet that could pay off, but it could also result in significant losses if prices do resume their decline. Personally, I’m staying out of the sector for now and see other opportunities elsewhere that seem more compelling today.

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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.

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