Is Oil's Rebound Real? Here's How You Should Invest

Since the bloodbath in crude prices in January when prices fell below $30 a barrel, there have been upward moves on several occasions, largely on hopes that oil-producing nations will agree to cut supplies to prop up prices.

These reasons haven't quite helped sustain any rally, short or long. The volatility of oil and gas prices is prompting investors to look outside the energy sector for reliable, market-beating gains.

However, over the past couple of weeks, developments on several fronts have helped crude oil prices reclaim levels of nearly $50 a barrel, up nearly 80% from January lows.

Can this carry crude oil through another leg of the rally? And if so, how can investors profit?

Let's first look at how valid the factors that are driving up crude prices.

First, Africa's largest oil producer, Nigeria, has been facing militant attacks on its oil facilities by the Niger Delta Avengers group. The group is angry at the government for marginalizing the region and oil companies for exploiting the reserves of oil at the expense of local people.

It has threatened to blow up all installations in the region if the companies don't stop work. This has resulted in crude oil output falling by 40% from recent highs to 1.4 million barrels per day.

A second reason that crude prices have risen is that Canada has struggled to bring one of its most destructive wildfires in years under control in the oil sands-producing region of Alberta. Although supplies should recover in the next few weeks, the disaster has already shaved off at least 1 million barrels per day of output, which is more than one-fifth of production.

Finally, with oil at levels unsustainable for most producers, shale production from the United States has steadily dipped, now down 500,000 barrels per day from its peak of 9.7 million barrels per day a year ago. Last week alone, the number of operating oil rigs in the United States fell by 10 to 318.

Oil will need to sustain these levels for shale drillers to resume production.

Goldman Sachs, which has one of the most bearish views on crude oil, recently, too, acknowledged the various factors supporting crude oil prices.

Apart from supply getting choked, Goldman also identified strong demand from China, India and Russia that have pushed the market from a situation of surplus supply to one of a "deficit in May."

Goldman's longer-term outlook is still for a gradual recovery in prices through next year, and it expects WTI NYMEX crude to average $45 per barrel in the current second quarter, up from its March estimate of $35 per barrel.

Developments such as Libya's likely resumption of crude oil supply and an oil-for-loans deal struck between the Organization of the Petroleum Exporting Countries members China and Venezuela are already keeping crude oil prices in check.

Although all this geopolitical unrest may be settled soon, the threats of OPEC partners Iran and Saudi Arabia increasing output to grab a bigger chunk of the market are becoming repetitive. Any uptick in weekly supplies and ramp up in production could also hammer down crude prices once again.

All these factor have and will likely continue to move the needle higher for crude prices, but investors must exercise caution and not be too optimistic. Consider wealth-building strategies outside the troubled energy patch.

Investors who are keen to invest in the sector would do best sticking to blue chips that are poised to rise with crude oil prices.

These include Chevron,ConocoPhillips, Marathon Petroleum and Valero Energy, which are still licking their wounds from the recent oil price collapse. All provide yields upwards of 3.5%, boosting their potential stock returns.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.