Oil price has been enjoying smooth sailing lately with U.S. crude topping the $70-per-barrel mark for the first time since November 2014. With the surge, crude has climbed 16% so far this year while Brent is up around 13%. The rally was driven by several factors that are pointing to a rebalancing of the oil market and infusing optimism among investors.
Inside The Surge
The first and foremost reason is the historic output cut deal, wherein OPEC, Russia and other producers have agreed to curb production that is paying off amid rising U.S. production. Secondly, speculation that the United States could renew sanctions against the major Middle East oil producer Iran has pushed oil price higher. Notably, President Donald Trump is seeking to restore sanctions on Iran, which were eased after an agreement over its disputed nuclear program, by May 12. If re-imposed, it would likely reduce Iranian oil exports, further tightening excess global supplies.
Additionally, falling production in Venezuela, where output has been halved since 2005 to below 2 million barrels per day due to an economic crisis, will continue to support oil price. On the other hand, accelerating economic growth across the world is raising demand for the commodity despite the greenback gaining some strength lately.
Adding to the strength is the positive roll yield in the futures market. This is because the oil market is currently in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, for months. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.
The combination of all these factors has increased the appeal for oil, fueling a rally in the energy space.
How to Play?
Amid the strong optimism, many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, a leveraged play on energy or oil could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products.
