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Oil dips back below US$40 per barrel – Should you dump your oil stocks?

Movements in the price of commodities like iron ore and oil make for easy headlines:

Oil dips below US$40 per barrel, close to 6-year lows”

But what do prices of oil below US$40 per barrel really mean for oil and gas producers like Woodside Petroleum Limited (ASX: WPL)? Presumably, the size of the impact depends on the cost of getting the oil out of the ground – more on that below.

The latest weakness in the value of oil – in this case, West Texas Intermediate, or WTI oil – was reportedly caused by a massive build-up of stockpiles at the Cushing exchange in the USA. Fairfax media reported that these stockpiles are the largest they’ve been since 1930.

With this in mind, it’s no surprise the price of WTI oil has dipped. However, Brent Crude oil remained roughly flat at US$43.59 a barrel.

Despite the headlines, there is no reason for any extra discomfort among Australian oil investors, since Woodside, Santos Ltd (ASX: STO), Oil Search Limited (ASX: OSH) and Senex Energy Ltd (ASX: SXY) price their oil according to Brent Crude, not the WTI benchmark.

For informational purposes however, I’ve gathered a sample of the production costs from some of Australia’s better known producers:

Santos Ltd – US$17.30 per barrel of oil equivalent (boe) total cash cost*, as at 21 August 2015

Oil Search Limited – US$10.93/boe total cash cost*, as at 25 August 2015

Woodside Petroleum Limited – US$12/boe total cash cost*, as at 19 August 2015

Senex Energy Ltd – US$32/barrel before royalties, as at 25 August 2015

*total cash cost includes production costs and royalties, but excludes corporate costs and capex

Readers can clearly see that that the majors enjoy a significant advantage in costs over smaller producers like Senex. Santos, Oil Search and Woodside have also been diligently reducing costs in recent years, and management teams indicate that further cost reductions could be incoming.

While the big names look to have fairly comfortable margins, these are pre-corporate overhead costs and pre-capital expenditure (‘capex’), which refers to the money that must be spent on exploring and drilling new wells.

My pick of the four right now would be Woodside, although Oil Search and Santos also look interesting. In October I wrote that there were faint signs the oil market could be stabilising, although I continue to believe it could be quite a while before we see an eventual return to US$80 or US$100 oil.

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Motley Fool contributor Sean O'Neill owns shares of Senex Energy Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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