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Can you bank on the oil rally to keep pumping share prices of Oil Search Limited and Origin Energy Ltd?

The energy sector has been running hot recently and will continue to rally today as crude prices jumped to fresh highs not seen since November 2015.

The West Texas Intermediate (WTI) benchmark has climbed to US$71.44 a barrel this morning and is up a whopping 51% over the past year with more short-term gains likely as the US reimposes sanctions against Iran at a time when the demand outlook for oil is bullish.

This backdrop has allowed the share prices of our energy stocks like Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Origin Energy Ltd (ASX: ORG) to outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, although some experts are warning that we could have overshot to the upside.

That’s pretty typical as price movements in any volatile market, like commodities, tend to be prone to knee-jerk reactions.

The oil bulls will point out that sanctions against Iran could cut more than 1 million barrels of crude a day from global markets, as was the case in 2011-12 – the last time the world punished the regime for its nuclear ambition.

Back then the WTI price has bouncing between US$90 to US$100 a barrel and some funds are already betting on oil hitting US$150 a barrel!

Great news for our oil-exposed stocks, including oil services company Worleyparsons Limited (ASX: WOR) and takeover target Santos Ltd (ASX: STO) which could force its bidder Harbour Energy to cough up more for control of the company, but it will be bad news for the rest of our economy as high oil prices will drag on growth.

But an article in the Financial Times highlighted the potential that the impact of the US President Donald Trump’s unilateral move to snub Iran won’t have as big an impact this time round with some experts quoted as saying the US sanctions may reduce global supply of crude by as little as 200,000 barrels a day.

This is because China is unlikely to side the US and the European Union may also look for ways to avoid slapping draconian sanctions against the country.

Furthermore, there’s more than sufficient capacity from OPEC and Russia to make up the short-fall. These oil producing countries have been cutting exports to counter the surge in US shale oil production.

There are too many variables to predict if oil will be heading to US$100 a barrel but that probably doesn’t matter to most investors as our oil stocks are likely to get an earnings upgrade even if oil hovered around current levels for the rest of 2018.

The oil and gas sector isn’t the only one with a bullish outlook. The experts at the Motley Fool are tipping another sector to outperform the market in 2018 and beyond.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.

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