World crude oil prices plunged 2% to a new 5-year low overnight after a US agency released data showing that US oil supplies are building up, indicating an increasing worldwide glut of the precious liquid.
Brent crude, the global benchmark price, fell 2.6% to US$57.88 a barrel- the lowest price since May 2009.
Australian Producers
The 48% fall in the Brent benchmark price throughout 2014 has hit the share price of Australia's oil and gas producers. Since reaching highs in the middle of the year, shares in relatively high-cost and heavily geared Santos Ltd (ASX: STO) and Beach Energy Ltd (ASX: BPT) have lost over 40% of their value, while lower cost producers Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL) have fallen between 10% and 20%.
Today however, all four have dropped by over 2% as the hope of a rebound in the oil price rapidly fades.
Questions for Australian Producers
The major questions being asked by investors and analysts are 1) what break-even costs Australian producers are working to, and 2) are gearing levels worryingly high.
Professional analysts have been debating for weeks the likelihood that Santos will need to raise equity in order to maintain its credit rating, and it also has some of the higher cost Australian production. This is a recipe for disaster in a low price environment, as evidenced by the concerns around iron ore companies like Atlas Iron Limited (ASX: AGO) at the moment.
Woodside and Oil Search meanwhile, have low-cost and long-life fields capable of withstanding the lower prices for an extended period of time.
Lower Prices
The major beneficiaries of the lower oil price appears to be retailers and companies exposed to discretionary spending. Australian department stores, including Myer Holdings Ltd (ASX: MYR) and Reject Shop Ltd (ASX: TRS), could see a sales boost over Christmas as consumers and businesses have more free cash to spend as a result of lower petrol prices.
