In morning trade the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has continued to push higher and is up 0.3% to 6,127 points.
A key catalyst for this strong performance has been gains in the energy sector. At the time of writing the S&P/ASX 200 Energy index is up 1.8% to a two and a half year high.
Here is the state of play right now:
- The Beach Energy Ltd (ASX: BPT) share price is up 1.3% to $1.71.
- The BHP Billiton Limited (ASX: BHP) share price is 2% higher to $32.82.
- The Oil Search Limited (ASX: OSH) share price has climbed 3% to $8.34.
- The Origin Energy Ltd (ASX: ORG) share price is up 1% to $10.01.
- The Senex Energy Ltd (ASX: SXY) share price is almost 2.5% higher to 44.5 cents.
- The Woodside Petroleum Limited (ASX: WPL) share price is up 3.5% to $33.51.
Why are energy shares roaring higher?
Energy shares have been roaring higher after oil prices surged to three and a half year highs overnight.
According to Bloomberg, WTI crude oil rose 3.2% to US$71.30 a barrel and Brent crude oil leapt 3.4% higher to US$77.40 a barrel.
Oil prices rose sharply after President Trump's decision to withdraw the U.S. from the Iran nuclear agreement and reimpose sanctions on Tehran.
Last time that sanctions were placed on Iran in 2012 its output fell by approximately 1 million barrels a day, leading to a 15% jump in prices, according to a note out of Capital Economics.
Although Saudi Arabia is expected to increase production to attempt to offset any decline in global output, there are concerns that this not be enough.
In addition to this, there are concerns that this decision will add to rising tensions in the Middle East and could lead to supply disruptions down the line.
Should you buy energy shares?
While I feel reasonably confident that oil prices will remain at elevated levels for some time to come, I think buying pure play oil producers is quite risky after their strong gains.
Because of this, I think the best option in the space for investors right now is BHP Billiton Limited due to its diverse operations.
