The rapid descent of oil prices continued overnight after the International Monetary Fund (IMF) cut its global growth forecasts while key producer Iran said prices could fall as low as US$25 a barrel.
While lower energy prices are usually linked with stronger economic growth, the IMF cut its global growth expectations to 3.5% this year, down from the 3.8% it forecast back in October, whilst also reducing expectations for 2016 to 3.7%. Based on expectations of lower fuel demand, West Texas Intermediate oil took a 4% dive while Brent crude, the global benchmark, fell 0.4% to US$48.65 a barrel. The latter has now fallen nearly 58% since June last year.
To make matters worse, Iran has painted a bleak picture for investors with the key producer saying prices could slip as low as US$25 a barrel without supportive intervention from the Organisation of Petroleum Exporting Countries (OPEC). OPEC is responsible for an enormous portion of the world’s supply but has refused to reduce production to bolster prices. While many OPEC members are calling for a cut in output, none of them appear willing to make the sacrifice themselves.
While equity markets around the world have been impacted by the oil crisis, companies in the energy sector have worn the brunt of it. The chart below demonstrates this perfectly.
Source: Google Finance
Since mid-June 2014, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has declined by less than 1%, while Senex Energy Ltd (ASX: SXY) and Santos Ltd (ASX: STO) have depreciated 64% and 50% respectively. BHP Billiton Limited (ASX: BHP), Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) have also crumbled more than 20% each.
Although some of the stocks in the energy sector are looking tempting at their depressed prices, investors would still be unwise to make a move. With oil prices tipped to fall even further, those investors holding the shares now could be in for a whole lot more pain before their fortunes start to turn around. While there could soon come a time to stock up on one or two of the industry’s strongest players, that time is not now.