Is it time to go bargain hunting in the energy sector?

In many senses, a falling oil price is good for an economy.

When oil prices are low, oil consumers save a considerable amount of money which can result in greater distribution of capital throughout the economy. This is something that most Australians can relate to: low oil prices means cheaper petrol which leads to greater disposable income and higher levels of spending.

This is particularly important around Christmas time where family holidays, parties and gift-giving can become quite expensive.

Not everyone is benefiting from low oil prices

Australian investors with a good portion of their wealth tied up in the stock market are suffering, badly. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen nearly 9% from its September high – once again bordering on that “technical correction” line. While The Australian Financial Review highlighted that, in US dollar terms, the local market has actually fallen into bear market territory. In other words, the benchmark index has dropped 20% from its September peak.

Indeed, the pain has been widespread throughout the market, but no sector has been impacted as much as the energy sector itself. Woodside Petroleum Limited (ASX: WPL), for instance, has fallen 16% since June, while Santos Ltd (ASX: STO) and Senex Energy Ltd (ASX: SXY) have dropped 48% and 59% respectively. Not even the world’s largest miner, BHP Billiton Limited (ASX: BHP), has managed to escape with its shares down 30% since late August.

The dramatic plunge of the oil price can be seen in the chart below:

Brent oil

Source: Australian Financial Review

As can be seen, Brent oil, which is the global benchmark, has dropped nearly 50% since June to be trading at a five-year low at US$59.75 per barrel. Unfortunately, things could be set to get even worse with some analysts forecasting it will fall to just US$40 a barrel, reflecting a further 33% downside risk. It’s difficult to imagine just how destructive that could be on the stocks in the energy sector.

Aside from those companies, the global economy could truly benefit from these lower oil prices. But should the price continue to plunge at such a dramatic rate, the list of consequences could be endless, and it seems that’s what investors may be so concerned about.

While Australian investors are already contending with plummeting iron ore and coal prices, lower oil prices could also result in civil unrest around the globe or major companies (or even nations) defaulting on their loans, amongst other risks.

What should investors do?

First of all, investors need to remain calm and not panic. As difficult as it can be to maintain composure when the stock market is seemingly flat-lining, these situations are when those who panic lose money and those who take advantage (by buying out-of-favour stocks) make their fortune.

On the other hand, I wouldn’t suggest investors should venture into the energy sector looking for bargains just yet. While I will certainly be looking more closely into the sector in the coming weeks or months, I won’t be making any purchases until the high level of volatility has subsided. After all, just because stocks have already taken a pummelling doesn’t mean they can’t or won’t fall any further.

In the meantime, I have been active in buying shares in other sectors which have indirectly been affected by the flailing commodity prices. In fact, one company that I was looking at very closely has actually just been highlighted by our top analyst as his number 1 stock to buy in 2015! With its shares currently trading more than 20% below their 52-week high, I think this stock is a standout buy today!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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