Before you get too cosy with Australia's energy stocks, you should know that another oil price crash could be just around the corner.
Oil prices have enjoyed a strong rebound over the last six weeks or so thanks, in part, to the closure of several hundred US oil rigs, bad weather and violence in the Middle East. But that could all change over the coming months, with some analysts suggesting prices could fall lower than they did in January.
A recap of what's happened
Oil prices have been in decline since June, but the heavy falls have been endured since November when OPEC, the Organisation of Petroleum Exporting Countries, elected not to curb its lofty production targets despite an oversupply of the resource globally.
One of the primary reasons behind the decision was to put pressure on shale producers which carry higher costs. Theoretically, the higher cost producers would have been forced out of the market, causing a reduction in production and thus higher oil prices. But instead, OPEC's decision has essentially set the stage for a battle for market share between OPEC and non-OPEC producers.
With global production reaching record levels (and demand softening), the price fell to the low US$40s range per barrel, although it has recovered marginally since. Brent crude is worth roughly US$58 a barrel while West Texas Intermediate (WTI) is fetching around US$50 a barrel.
Get set for another tumble…
Several hundred high-cost US oil rigs have been closed as a result of the low price environment. However, inventory levels in the United States are the big concern – they're now sitting at an 80-year high, putting enormous downward pressure on the resource. According to CNBC, the US produced 9.32 million barrels a day last week which is actually a multi-decade high.
CNBC also quoted Citigroup energy analyst Eric Lee as saying that WTI crude could easily head toward US$40 a barrel in the near future (roughly 20% below today's price), while it could even fall to US$20 a barrel before bouncing back. Should that happen, you can be sure that some producers will be forced out of the market completely.
What this means for you
With oil prices having stabilised in recent weeks, it seems that investors are more confident to wade back into the sector. Indeed, if the resource rebounds, the profits could certainly be pretty.
But beware. If Lee and various other analysts are right about a pending oil crash, expect plenty more blood to be shed from companies like Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL), BHP Billiton Limited (ASX: BHP) and Senex Energy Ltd (ASX: SXY). Remember that even though billions of dollars have already been wiped from their market values, their shares could still fall significantly further, wiping out your hard-earned money in the meantime.
