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Why ASX oil stocks could be set to surge this morning

Barrels of oil with rising arrow, oil price increase
Image source: Getty Images

Our energy stocks could be poised to jump this morning although the rest of the sectors on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index could struggle as the price of oil spiked.

The Brent and West Texas Intermediate (WTI) benchmark crude prices have surged in early trade with Brent climbing 17.4%, or US$10.47, to US$70.69 a barrel while the WTI rallied 12.5% to US$61.72 a barrel.

The increases are more than what many analysts were expecting and it comes after an unprecedented attack on Saudi Arabia’s energy infrastructure over the weekend.

Why the oil price is surging higher

Oil and gas producers like the Woodside Petroleum Limited (ASX: WPL) share price, Oil Search Limited (ASX: OSH) share price, Santos Ltd (ASX: STO) share price and Beach Energy Ltd (ASX: BPT) share price are the likely beneficiaries of the expected rise in the commodity, although the spike in the oil price could drag on the rest of our economy if it stays higher for longer.

Saudi Arabia was the world’s largest exporter of crude in 2018 and around half of the kingdom’s oil output has been disrupted by drone attacks over the weekend that left its production facilities ablaze. This accounts for around 5% of global daily supply.

The fires are so large that it can even be seen in space and the US is blaming Iran for the attack, which may be a second supporting factor for oil.

US-Iran relations a second supporting factor

The Brent and WTI benchmark prices have been on a backfoot recently and that is partly attributed to US President Donald Trump’s apparent willingness to negotiate a new deal with Iran to ease sanctions against the Persian nation and allow it to re-start oil sales.

While the Iranian-backed Houthi rebels in Yemen claimed responsibility for the attack, the US is pointing its finger at Iran because it believes the drone attack was too sophisticated to be carried out by the rebel group.

It is unclear how potential US-Iran negotiations could be affected at this stage, but it’s a set-back.

Will the oil price rally be sustained?

On the other hand, some do not think that the oil price surge will last for long. Saudi Arabia is scrambling to fix the damaged infrastructure and restart production.

Meanwhile, the US said it would release some supply of crude from its massive strategic reserves to fill the gap.

To be sure, the world isn’t short of crude either due to the slowdown in the global economy. This is another reason why the commodity has been sliding.

The attack could put a floor on crude prices but it’s unlikely that it will send the Brent price anywhere near the four-year highs of US$84.16 a barrel that it hit in October 2018.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

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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