The ASX energy sector is on a tear since the oil price bounced from its unprecedented meltdown, but the bears might be ready to pounce again.
In case you forgot, the WTI crude benchmark crashed into negative territory for the first time in history on April 20 before rebounding to US$35 a barrel while the Brent nearly doubled since bottoming to US$38 a barrel.
The turnaround sent the Oil Search Limited (ASX: OSH) share price jumping 27% and the Santos Ltd (ASX: STO) share price climbing 25% over the period.
These stocks are more leveraged to the oil price and explains why the Woodside Petroleum Limited (ASX: WPL) share price is trailing with "only" a 9% gain. But that's still miles ahead of than the 5% increase in the S&P/ASX 200 Index (Index:^AXJO).
More production cuts to support market
However, the party for our energy producers may not last. Experts are casting doubt on the sustainability of the oil price rally even as OPEC and Russia (OPEC+) moved forward their meeting by a week to this Thursday.
There's speculation that the oil producing bloc will extend the supply cuts that triggered the recovery and moved their next meeting forward to speed things along.
But Australia and New Zealand Banking GrpLtd's (ASX: ANZ) commodities strategist Daniel Hynes told the Australian Financial Review that this could be a bearish sign instead.
Oil party pooper
OPEC+'s eagerness to bring forward their meeting and keep production quotas in place signify that demand for crude isn't recovering at the same pace as prices.
Demand for oil plummeted due to the COVID-19 shutdown of the global economy. While the gradual reopening of some countries is lifting demand for fuel, the recovery is patchy, especially as air travel remains off the cards.
The widespread racial riots in the US sparked by the death of George Floyd is also hurting demand for the commodity.
US drivers in a jam
The US summer driving holiday season looks over before it began with Hynes saying that demand was down 25% to 30% over the Memorial Day holiday on May 25, which usually kicks off the season.
"The US driver consumes about 10% of the world's oil. So, it's an important sector," he told the AFR. "Any data highlighting how it's going will be focused on."
Foolish takeaway
While oil market looks prone to a pullback, or even a correction, its unlikely that we will see oil turn negative again.
As I wrote back then, that was probably the only occasion time in our lifetime that we will witness such an event.
This means the worst for the market is likely behind us, although the volatility means investors will need to reasonably strong stomach if they wanted to invest in ASX oil-exposed stocks.
