Is the ASX energy sector at a turning point as the oil price jumped for a sixth consecutive trading day?
The Brent oil price rallied 13.9% to US$30.97 a barrel while the WTI benchmark added 3% to US$25.30 a barrel.
Some experts believe we may have passed "peak glut" and the oversupply challenge that's hammering the sector is easing.
ASX oil shares on a bounce-back
This oversupply issue sent the WTI price plunging to negative US$37.63 a barrel for the first time in history on April 20.
ASX shares exposed to the oil market have also bounced after the big sell-off. The Santos Ltd (ASX: STO) share price surged 16%, the Oil Search Limited (ASX: OSH) share price climbed 8% and the Woodside Petroleum Limited (ASX: WPL) share price gained 7% since.
In contrast, the S&P/ASX 200 Index (Index:^AXJO) stayed flat over the last two weeks even though the broader market is well ahead of the energy sector since the onset of the COVID-19 crisis.
COVID-19 headwind easing
There are a few reasons behind oil's improving outlook. The global economy is slowing reopening following a long shutdown to contain the coronavirus outbreak.
This shutdown pushed oil demand off a cliff but we have probably seen the low point for demand as countries, from the US to Europe, try to restart their economies.
The end of the Saudi-Russia oil price war that led to a reduction in output from OPEC and friends is also helping to rebalance the market.
Supply-demand balance reset
Major oil producing nations have agreed to slash production by nearly 10 million barrels a day. US shale producers have also curb production, but not by choice.
The very low oil price forced the industry to its knees and many US producers are unlikely to survive.
That's good news for the oil price as US shale contributed substantially to the supply imbalance.
Risks still remain
But the ASX energy sector isn't out of the woods. Falling supply and a gradual increase in demand will still leave the world with too much oil.
What's more, the lack of storage capacity (the main reason why oil turned negative last month) is still a persistent problem.
There is also talk that US shale producers could start coming back to life if the WTI price climbs to US30 a barrel. That could be a near-term possibility given that the WTI is within striking distance of that level.
Further, even as the oil price improves, there is still a real risk that some in the sector will need to do a capital raising to repair their overstretched balance sheets.
It could be a while before the energy sector catches up to the broader market.
Foolish takeaway
But patient investors may want to start dipping their toes back into beaten down quality energy stocks.
The oil price may not be running up to pre-coronavirus levels anytime soon, but its unlikely to stay under US$20 a barrel over the long term.
You just have to make sure you pick the right oil stock that can last the distance.
