Oil prices sink to 5-week lows: Time to sell your oil shares?

So far it hasn’t been a great day for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). In early afternoon trade the benchmark index is trading lower by 0.7% thanks largely to a sharp drop in the energy sector.

The shares of BHP Billiton Limited (ASX: BHP), Santos Ltd (ASX: STO), and Woodside Petroleum Limited (ASX: WPL) have all dropped noticeably lower today after oil prices dropped to five-week lows.

According to the Wall Street Journal WTI crude for December delivery settled down 3.8% to US$46.86 a barrel on the New York Mercantile Exchange yesterday. Brent crude oil didn’t perform much better and was down 2.8% at US$48.30 a barrel.

It would appear as though the market has doubts about the proposed production freeze by the Organization of the Petroleum Exporting Countries (OPEC).

The oil cartel planned to sign an agreement to limit production to between 32.5 million and 33 million barrels per day at its meeting later this month, but this is becoming increasingly unlikely according to the report.

OPEC members appear to be deadlocked and I would be surprised if they were able to come to an agreement. This is not the first time the oil cartel has attempted this, with previous attempts failing miserably.

In addition to this, daily oil output in the United States has been increasing. The latest figures for the month of August reveal a 0.6% increase month on month to 8.7 million barrels.

If OPEC fails to freeze production and US oil output continues to grow, there is a real chance of heightened oversupply in the global market in my opinion.

For this reason I think oil prices could yet fall lower and drag the shares of some of Australia’s leading oil producers down with them. So right now I think the prudent thing to do would be to avoid the oil sector and focus elsewhere in the market.

Instead of risking money in oil shares I would recommend an investment in these growth shares. Each has strong growth potential and isn't impacted by fluctuating commodity prices.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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