The energy sector is the best performing part of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index as the oil price staged a big bounce in overnight trade.
The Woodside Petroleum Limited (ASX: WPL) share price surged 4.4% to $31.13 during lunch time trade while the Origin Energy Ltd (ASX: ORG) share price rallied 5% to $6.44, Santos Ltd (ASX: STO) improved 3.3% to $5.42 and Oil Search Limited (ASX: OSH) share price added 2.9% to $7.09.
In contrast, the ASX 200 benchmark gained 1.5% to 5,576 at the time of writing as almost every sector made gains following a big jump on Wall Street last night.
The Good Oil: Energy sector leading the market higher
Source: NAB Trade
Why oil is rising to the top
But the gains by energy stocks were particularly pronounced as improving risk appetite and a rebound in the oil price provided a double tailwind to the sector.
The Brent crude benchmark jumped 7.7% to US$54.39 a barrel while the West Texas Intermediate (WTI) gained 8.8% to US$46.06 a barrel.
The bullish surge is prompted many to ask if the embattled share prices of our energy stocks have bottomed.
Is the worst over?
To better answer the question, we need to look at what's driving the oil price rebound. Fears of an oversupplied oil market in 2019 were assuaged by comments from Russia that it was willing to work with OPEC at any time to ensure price stability.
Some Russian oil executives have also said that they expect the oil price to hover around these levels, if not higher, next year.
OPEC and Russia have indicated support for cutting oil production at their latest meeting but Russia, which is the third largest global oil producer, didn't want any of the cuts to come from its quota.
This has sparked fears that OPEC's alliance with Russia was breaking down after a period of production discipline from the major oil producing countries.
Still on a slippery slope
The more consolatory overtures from Russia is a positive but the latest comments don't add up to much – at least not in my view.
Nothing has fundamentally changed and Russia hasn't made any new commitments that would trigger a sustained rebound in crude prices.
However, what may have changed is risk appetite. Market bulls have been sitting on their hands even as the share market falls have pushed equities into value territory.
Many investors are keen to buy but no one wants to be the first to jump in.
The big surge in global markets may change this fear of buying into FOMO (fear of missing out). If this is the case, energy stocks will benefit materially from turnaround in sentiment – and this may be a more important driver of share price performance than a rebounding oil price.
