This Nov. 6, 2013 file photo shows a Whiting Petroleum Co. pump jack pulls crude oil from the Bakken region of the Northern Plains near Bainville, Mont.Matthew Brown/The Associated Press
Thanks to the recovery in energy prices, oil and gas stocks have been on a fierce rally.
The S&P/TSX Energy index gained more than 3 per cent last week as the price of West Texas Intermediate surged to around the $57 (U.S.) per barrel level.
Falling rig counts appear to finally be translating into a plateau in production, a supply response that may help bring the market into balance and support crude prices.
Data from the U.S. Energy Information Agency indicates that domestic production has declined in two of the past three weekly readings.
In a note to clients, Bank of Montreal energy analyst Randy Ollenberger writes that "we are on the cusp of material production declines."
On the surface, one would assume that this is quite bullish for oil prices.
However, Mr. Ollenberger thinks any advance in crude oil prices will prove to be short-lived.
There are a plethora of wells that have been drilled but not yet completed, allowing for a quick supply response in the event that oil prices continue to firm.
The immense amount of crude oil in storage and these "standing wells" will place a cap on oil's rally, according to the analyst.
"Any material price improvement will be sufficient to incentivize accelerated completion activities and drive near-term production growth," he writes.
As such, Mr Ollenberger recommends that investors wait for better buying opportunities in energy stocks as commodity markets meander toward a new equilibrium in the coming months.
"Naturally we have received many questions from clients given that we currently recommend an underweight position for the energy sector. Unfortunately, the way we see it is that nothing has really improved from a macro and fundamental standpoint, both of which remain quite challenging for the sector, in our view. Therefore, we remain comfortable with our cautious sector stance," he said.