The oil bust continued overnight with Brent oil dropping another 4.5% to US$50.74 a barrel and WTI (US) crude slipping roughly 4% to just US$48.01, sending equity markets around the world into a frenzy.
With oil prices having now lost around 10% of their value in just two days, the Dow Jones and NASDAQ indices fell 0.7% and 1.3% respectively while the S&P 500 retreated 0.9%. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has followed suite with stocks such as Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) weighing the benchmark index down 0.6%.
While lower oil prices should really provide a basis for greater economic growth, investors are clearly concerned about what could happen should prices fall much further. While the obvious consequence would be that many non-OPEC oil producers could be forced out of the market, there is also the very real risk of geopolitical consequences such as rising unemployment and slowing growth in the US which could then cause contagion effects throughout the global economy.
Similarly, net exporters of oil, such as Russia, Nigeria, Iraq and Venezuela could be hit hard, putting their budgets at risk. Should any of them default, the global economy could experience further ripples.
Unfortunately, there is no way of knowing just how low oil prices will drop. Indeed, given that they've fallen nearly 10% in the last two days indicates that the downwards momentum isn't slowing down with some analysts suggesting it will bottom out at around US$40 a barrel. Indeed, it has the potential to drop well below that figure.
Here's what to do
The safest move investors could make is to avoid the sector for now. Although companies such as BHP Billiton Limited (ASX: BHP) and Senex Energy Ltd (ASX: SXY) are looking more compelling at their current prices, they could fall much further if oil prices continue to fall. Until the high level of volatility wears off, investors should stick to other sectors where there are still plenty of other fantastic stocks trading at outstanding prices, which could deliver fantastic returns over the coming years.
