The energy sector is on a slippery slope with the share prices of Oil Search Limited (ASX: OSH) and its oil and gas peers rapidly retreating from their stellar rally over the past few months.
This is prompting some to ask if the golden run for the sector has come to an end and whether it is time to take profits.
The medium-term answer is "no" but the short-term answer may be something else altogether as history suggests that this is a good time to cash in some chips with crude oil prices typically trending lower over the next few months.
Before I explain more about the seasonal weakness, longer-term investors shouldn't be too concerned as the outlook for the commodity is still bright even on news reports that Russia is looking to negotiate with OPEC to increase its production quota.
The remarkable self-control displayed by OPEC and Russia in holding back production is one of the key reasons for the surging oil price, which has rallied around 50% over the past year.
Commodity analysts are still bullish on oil and several have upgraded their price forecasts on the black gold for 2018 and beyond.
I believe oil stocks will end this calendar year on a high note even as the share prices of Oil Search and Woodside Petroleum Limited (ASX: WPL) have weakened 1.2% and 2.5%, respectively, ahead of the market close.
The big drop in takeover target Santos Ltd (ASX: STO) after it spurred the advances of Harbour Energy isn't helping sentiment either!
Sentiment towards the sector has soured a little as crude oil prices are retreating. It's a little early in the year for this as a note from Bell Potter's trading and sales desk showed that crude tends to slip (pardon the pun) from mid-June to mid-August.
However, the broker thinks this is a good time to be taking profits as "May tends to be the last of the golden run [for oil stocks] that usually goes from February to May".
In fact, this month is the best time of the year for our oil and gas stocks. Since 2000, the sector has generated an average gain of nearly 3%, while the months of September through to November are among the weakest.
I think we will see the sector return some of its gains from earlier this year, but I don't think the weakness will last that long this year because analysts have turned decisively bullish on the outlook for oil in 2018 and 2019.
Further, the strong merger and acquisition (M&A) interest in our oil and gas stocks, coupled with a weakening Australian dollar, will provide a tailwind to the sector.
This isn't the only sector that is well placed to outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO). The experts at the Motley Fool are very bullish on the outlook of another niche segment of our market.
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