The Organisation of Petroleum Exporting Countries (OPEC) stunned some market commentators on Thursday night when it announced that the 12-nation group would not cut oil production in light of the recent plunge in the oil price.
This didn't help the oil price.
The West Texas Intermediate (WTI) crude oil price subsequently fell 11% on the news to a new five-year low of just $66.15. The oil price has plunged 40% from $109 at the beginning of the year to Friday's close and has taken with it the share price of some of Australia's largest oil producers.
Australia: Caught in the middle
Australia's oil producers have essentially been caught in the middle of a standoff between the Saudi-controlled OPEC and the US shale oil producers. Who will blink first, the low-cost OPEC members that rely on higher prices to balance their national accounts, or the US shale producers that may already be trading at a loss?
Regardless of which side 'wins' this standoff, Australian companies are suffering and it'll take a brave investors to dive in right now. There could be many more days like Friday around the corner but there appears to be little doubt from analysts that the oil price will recover to more sustainable levels over the medium term.
Bloodbath
Friday was a tough day for investors in Australia's oil and gas producers. Here's the run-down:
Santos Ltd (ASX: STO) fell 13%
Oil Search Limited (ASX: OSH) fell 5%
Woodside Petroleum Limited (ASX: WPL) fell 7%
Karoon Gas Australia Limited (ASX: KAR) fell 11%
BHP Billiton Ltd (ASX: BHP) fell 4%
Beach Energy Ltd (ASX: BPT) fell 5%
2015 Recovery?
Friday capped off an average 2014 for Australia's largest oil producers, Santos is currently down 31%, BHP is down 19%, Beach has fallen 28% and Oil Search has been easily the best performer having lost only 1.73%.
Their success in 2015 is largely out of their own control and therefore almost impossible to predict. Supply from the major oil producers, OPEC and the US, will determine the direction of the oil price and thus profitability of our big producers. This is the downside of owning price-taking companies.
Wise investors for years have ignored resources companies and preferred to invest in companies that dominate their industries and are able to set prices in order to maintain profitability.
