Oil prices plunge to six-year low: Is it time to sell?

It was another horror session for commodity markets on Friday night but while iron ore continued its sharp descent, it was oil prices that dominated news headlines – and for good reason.

The question on investors’ minds today will no doubt be ‘how low can oil prices go?’ After trading for north of US$115 a barrel in the latter half of 2014, they have progressively fallen and hit their lowest price in almost seven years on Friday.

In fact, according to The Australian Financial Review, they hit their lowest price since Christmas Eve in 2008. The falls have nothing to do with the build-up to Christmas, but rather the concern regarding oversupply of the resource in the global market.

Indeed, the most recent setback for the resource came after the Organisation for Petroleum Exporting Countries, otherwise known as OPEC, ignored the market’s pleas to set a production limit. Instead, it will continue to fight for market share, even if that means lower prices. As highlighted by The Guardian, OPEC’s “complete disarray” at the meeting was also a factor, reflecting the level of disorder in the world’s biggest oil cartel.

The West Texas Intermediate crude oil price, which is the US benchmark, sunk under US$40 a barrel, as did the global benchmark Brent crude oil price. It sunk 5.3% to just US$37.61 a barrel for the first time since early 2009.

It has also been suggested that the El Nino weather phenomenon that is creating milder winter conditions in the United States could also be impacting demand for heating oil which could force prices even lower.

This is a huge worry for investors in the oil and gas sector, many of whom will likely have already experienced major declines in the value of their investments over the last year or so.

Today alone, shares of companies like Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) have fallen 2.4%, 4.8% and 5.7%, respectively, while BHP Billiton Limited’s (ASX: BHP) share price has also fallen 2.7%. The falls across the sector have been enough to drag the entire S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) 70 points, or 1.4% lower.

Although many of the companies’ shares within the sector are hovering near multi-year lows, there is every possibility they could continue to fall further should the resource’s price continue to decline. While some investors may want to take that risk in the hope of some strong returns, it’s a risk I certainly won’t be taking anytime soon.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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