Most of Australia's energy and gas shares have fallen sharply today after the oil rally faltered overnight.
At the beginning of the year, oil prices experienced one of the most violent slides in history as it fell to a low around US$27 a barrel – a price not seen in almost 13 years. But it soon rebounded sharply, even entering an official bull market, as it soared back to nearly US$36 a barrel.
The rally was based on speculation that a deal could soon be reached between OPEC and non-OPEC producers to limit production in order to bolster prices.
However, that remarkable rally came to an abrupt halt overnight. On the demand side, investors are likely reacting to signs that China's industrial activity is deteriorating while OPEC, (Organisation of Petroleum Exporting Countries), continues to produce record amounts of crude. As a result of the glut, Brent oil slid 4.6% to US$34.35 a barrel while West Texas Intermediate crude plunged 5.7%.
Indeed, lower oil prices have caused havoc in the financial markets, but energy and gas shares have clearly been hit the hardest. Big-name companies such as BHP Billiton Limited (ASX: BHP) and Woodside Petroleum Limited (ASX: WPL) have been forced to take billions of dollars in impairments as a result, while others are likely struggling to operate at profitable levels at these prices.
While most shares in the sector have suffered major declines over the last 18 months or so, many are also showing steep declines today. Woodside Petroleum and BHP are down 2.9% and 2%, respectively, while Santos Ltd (ASX: STO), Origin Energy Ltd (ASX: ORG) and AWE Limited (ASX: AWE) have fallen 3.3%, 4.8% and 6.2% respectively.
Although it's possible that oil prices may have bottomed out, there seems to be a greater likelihood of further declines over the coming months. Indeed, there is no guarantee that the world's biggest producers will reach a compromise on production, while it is likely that they will continue to flood the market with supply they simply.
As a result, investors may want to avoid the sector for now and look at the various other opportunities presenting themselves elsewhere in the market instead.
