The energy sector could be about to jump higher again after its recent pause as oil bulls are starting to reassert themselves in the commodity market.
The sector has bested other sectors with a 35% surge over the past year when the broader S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 9%.
But oil and gas stocks came under profit taking pressure earlier this month on global economic jitters and speculation about an increase in supply.
However, the bulls are coming back. Bloomberg reported that traders have lifted their net-long positions in the Brent crude benchmark by 4.1% after cutting them by the most since 2016 last week. Net long positions are the difference between bets that the commodity will rise versus a fall.
Rumours that the US has begun identifying targets in Iran for a military strike will add upward pressure on prices. While the US administration had denied this, it’s hard to tell the difference between truth and spin given the way President Donald Trump has been communicating to the public.
Trump is trying to drum up support for his sanctions against Iran, which in itself is supportive of higher crude prices, while Saudi Arabia has temporarily stopped shipping oil via the Red Sea after it reported that two of its tankers had been attacked by Yemen’s Houthi militia.
Iran has also threatened to block shipping lanes if new sanctions are imposed on the country, which in my view supports the rumours that the US is drawing up military plans.
Trump may be trying to talk down the oil price to shore up his domestic support base but the rising geopolitical tension, most of which is by his own making, is creating a perfect environment for the oil price to move higher.
Some experts are urging investors to buy the dip in the commodity with Goldman Sachs predicting that oil will retest its US$80 a barrel high before the end of 2018.
However, the bullish sentiment hasn’t spilt over to the West Texas Intermediate (WTI) benchmark due to record US shale oil production of 11 million barrels a day.
But the lack of pipeline infrastructure to export the oil means that the surge in supply from the Permian Basin can’t help balance global supply.
Our oil stocks are more exposed to the Brent benchmark than WTI, so this means we could see the likes of Oil Search Limited (ASX: OSH), Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) power ahead in the near-term.
The rest of 2018 looks supportive for the sector given the numerous and volatile geo-political and economic factors that are steering the price of oil.
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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.