The share prices of our oil stocks are on a run as the crude price mounted a recovery from the recent sell-off.
Investors beware! The recent oil price performance is driven more by politics than by fundamentals and some experts are doubting that the Brent crude benchmark can recapture last month's high of over US$80 a barrel.
However, anyone who claims to know is guessing. Geopolitics is unpredictable and there are so many economic and political factors impacting on the commodity that it can easily move in either direction.
This makes it difficult to ascertain if our oil stocks are still worth backing after their impressive rally over the past year that has sent Santos Ltd (ASX: STO) surging 82%, while Origin Energy Ltd (ASX: ORG) jumped 35% and Oil Search Limited (ASX: OSH) increased 22%.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 6% over the same period and oil stocks are once again leading the market higher today.
Here are three things that can rattle the sector. The first is Iran. The restarting of the Iranian sanctions has been well flagged to the market but sanctions in themselves are not even half the story.
An article in Bloomberg speculates that Iran will find ways to retaliate if sanctions are reintroduced. This could prompt the Iranian government to step-up its covert campaign to attack major oil producer Saudi Arabia either militarily or economically.
Iran can provide resources to the Houthi rebels to launch more effective missile or drone attacks on the Arabian country's oil infrastructure and it could also mount cyber attacks against that country's oil company Saudi Aramco (which Iran is alleged to have done before).
The motivation for Iran to undertake such actions isn't just ideological in my view. Iran will have a bigger incentive than most to drive oil prices higher if it has to sell its crude at a discount on the black market.
The higher the oil price, the more willing buyers it will find and the better the price it will receive.
But Iran isn't the only flashpoint for the oil market. The Bloomberg article also names a host of other politically unstable big oil-exporting countries, such as Venezuela and Libya, as drivers for higher oil prices.
There doesn't seem to be a near-term fix for these countries and the uncertainty over their oil export volumes will continue to cloud the market.
Thirdly, I think investors should pay close attention to the upcoming initial public offer (IPO) of Saudi Aramco, which could potentially be the world's biggest listed company.
Some believe the Saudi government is artificially bolstering the oil price to get a better price on the share sale and that the commodity will go into a free-fall once the IPO is completed.
I am not so sure as the country is only selling 5% of its national oil company and the fact that Iran may tempted to be a thorn in the side of Saudi Arabia could well negate this downside risk.
No one knows when the IPO will be announced but it's certainly something investors should look out for as the oil price could suffer from whiplash around the time of this transaction.
