Equity markets around the world crumbled overnight, led down by stocks in the energy sector as oil prices fell to their lowest levels in around five-and-a-half years.
Brent oil extended on last year's nearly-50% slump, falling 4.9% to just US$53.65 per barrel while US light crude oil fell below US$50 on Monday for the first time since early 2009. Both benchmarks have fallen for six consecutive weeks thanks to waning global demand coupled with a massive oversupply in the marketplace. Reports that Iraq and Russia had recently posted record oil supplies have heightened those concerns even further since the beginning of the New Year.
Unfortunately, the Australian stock market has had a similar reaction this morning. After rising by 0.3% on Monday, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has retreated by 1.4% led down by stocks such as BHP Billiton Limited (ASX: BHP) and Woodside Petroleum Limited (ASX: WPL), which have fallen 4.2% and 5.1% respectively. Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY) and Sundance Energy Australia Ltd (ASX: SEA) have also dropped between 6.8% and 8.9%.
Although share prices in the energy sector have already fallen to multiyear lows, investors should brace for even further pain. As reported by The Australian, Morgan Stanley believes that the oil glut is likely to increase with new production expected to ramp up at a number of fields in Brazil, West Africa and in the US and Canada. With lacklustre economic data emerging from China and Europe, Morgan Stanley isn't too bullish on the demand side either.
While some analysts expect the price to plunge as low as US$40 a barrel however, it's difficult to see how it could stay that low for too long. Even at today's depressed levels, many projects in the US have likely become uneconomical which should eventually slow US supply growth, applying less downwards pressure to the commodity's price.
Given the high level of volatility still facing the industry, investors ought to remain on the sidelines for now, but should the share prices fall much further over the coming months, some of the bargains in the sector may prove too difficult to ignore.
