The severity of the fall in the price of oil has been one of the hottest topics in the financial media over the last eight months, but it is the uncertainty of where it will go next that investors really need to be concerned about.
As of this morning, Brent oil, the global benchmark, was priced at just over US$58 a barrel. While that's still a long way off the US$115 it was fetching back in June last year, it's certainly a step up from its US$48 price tag, recorded less than a fortnight ago. But where it will go next is anybody's guess.
US$200 a barrel…
As I wrote last week, the Organisation of Petroleum Exporting Countries' (OPEC) own Secretary-General, Abdulla al-Badri, predicted that the oil price could surge towards US$200 a barrel over the coming years. This would come as a result of underinvestment in new projects (due to the low oil prices) which would replace the oversupply issue with a severe undersupply scenario.
While US$200 a barrel might seem like a long-shot, prices could certainly rebound higher than their current level. According to industry analyst Baker Hughes, just 1,223 U.S. oil rigs remain in operation (down from more than 1,600 a few months ago) with several hundred more expected to close in the coming months. This could certainly help bolster oil prices and boost the earnings of Australia's energy producers.
…Or US$20 a barrel?
On the other hand, the price of oil could just as easily go the other way, reversing its recent gains, and then some. As reported by MarketWatch, analysts at Citigroup suggested the possibility of a fall to the US$20 range for West Texas Intermediate crude, citing oversupply as a key factor. That would mean a drop of more than US$30, or 62%, from its current price of around US$53 a barrel.
It's important to remember that the closure of U.S. oil rigs isn't necessarily indicative of a reduction in supply. While OPEC nations could easily take the opportunity to increase their own market share in a higher price environment, U.S. producers would also be closing high-cost rigs in order to increase their focus on low-cost rigs. That is, production may not fall by much, if at all, in response to the rig closures.
Should you buy?
Of course, investors have certainly been enticed by the energy sector in light of oil's recent resurrection. Strong gains from companies like Senex Energy Ltd (ASX: SXY) and Santos Ltd (ASX: STO) are evidence of this and investors want to know if there are still massive gains to be made.
In short, there certainly could be. Other companies such as Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) could also rebound further if prices continue to rise. However, should prices head in the opposite direction, the losses experienced by investors could be catastrophic (remembering that you can lose 100% of your investment, in a worst case scenario).
