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Oil shares are ready for a big rally but can the party last?

Oil & Gas stocks

The share prices of our oil and gas producers are set to stage a rally on the back of a big jump in the price of crude over the weekend.

The irony is that the commodity surged after OPEC and friends (with analysts calling the group OPEC+) promised to increase crude production to bring comfort to consumers suffering from a significant increase in fuel costs.

That doesn’t seem to have worked very well with the price of the West Texas Intermediate (WTI) rallying 5.7% while the Brent crude benchmark gained 3.4%.

Hopefully you have some oil stocks in your portfolio to offset your pain at the bowser. Our oil stocks like Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Origin Energy Ltd (ASX: ORG) are likely to jump ahead after a bout of profit taking last week.

OPEC+ said that they will increase their production quotas by around 1 million extra barrels per day and that is less than what the market was expecting.

It’s a significant victory for the major oil exporting nations. They’ve managed to overcome internal squabbling to actually reach a consensus. That’s a big deal given that Iran had vehemently opposed any increase while Russia was pushing for more.

The fact that OPEC+ is still speaking with one voice will ensure that the cartel remains relevant and can exert influence on the direction of the market.

OPEC+ can also look like the “good guys” by claiming that they are listening to the concerns of oil consuming nations while still benefiting from a firmer oil price, which comes at a time when the US dollar is gaining strength.

This should translate to a double win for our oil stocks too and could provide another reason for analysts to upgrade their valuations on the sector.

The energy sector is the best performing sector on our market over the past 12-months, even beating the tech sector – which has been buoyed by shooting stars like WiseTech Global Ltd (ASX: WTC), Xero Limited (ASX: XRO) and REA Group Limited (ASX: REA).

I am not saying investors can expect another 40% run up for the sector but I believe energy stocks will remain very well supported in FY19 even if the oil price hovers around US$70 a barrel for the rest of the year.

We don’t need oil prices to be at US$100 a barrel for further upgrades to oil & gas stocks. If anything, I think oil prices around this level are the “Goldilocks” zone for the sector where there’s good profit to be made for the oil and gas producers while the broader economy isn’t dragged down by rising energy costs.

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Returns As of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of WiseTech Global and Xero. The Motley Fool Australia has recommended REA Group Limited. 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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