Australia’s energy stocks plunge: Is there more pain to come?

Liquefied Natural Gas Ltd (ASX:LNG), Woodside Petroleum Limited (ASX:WPL) and Santos Ltd (ASX:STO) are all acting as a drag on the market today after oil prices fell more than 5% overnight.

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Oil prices have come under intense pressure in recent weeks and the rout only continued overnight with the world’s benchmark price plunging more than 5%, falling below the US$50 a barrel mark for the first time in more than six months.

While the commodity was already in an official bear market (defined as a drop of 20% or more), Brent crude, which is the benchmark for most countries around the world, fell another 5.2% to US$49.52 a barrel while West Texas Intermediate, the US benchmark, fell 4.1% to US$45.17 a barrel, according to The Wall Street Journal (TWSJ).

Indeed, there are numerous reasons why the resource has come under such heavy selling pressure and the signs indicate conditions will continue to get worse before they get better.

One of the biggest factors impacting the market’s sentiment appears to be comments from Iran, which stated that it would boost production immediately after sanctions are lifted as part of the Iran Nuclear Deal. The market is already saturated with more barrels of oil than it needs so a boost from Iran, which is said to be home to the world’s fourth-largest oil reserves, will only increase the supply-side pressure.

At the same time, the market is also concerned about waning global demand for the resource. Recent data shows that Chinese manufacturing activity has slowed to a two-year low while the nation’s stock market is also under immense pressure which could impact growth further. Given that China is the world’s second largest consumer of oil (behind the United States), a reduction in demand would create a further imbalance between global supply and demand, forcing prices even lower.

Here’s how some of Australia’s energy producers are reacting to the resource’s plunge today:

As cited by TWSJ, David Hufton of oil brokerage PVM said: “The prospects of a second half-year price rebound have evaporated and there is a clear and present danger of prices revisiting their previous lows of the year.” Indeed, there is every chance they could fall even further than that, making the oil sector a risky prospect for investors today.

Rather than taking an unnecessarily high level of risk on the energy producers, there are plenty of other great opportunities currently presenting themselves to investors — you just need to know where to look!

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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