Here’s why the Santos Ltd share price is crumbling today

Australia’s oil and gas shares have come under intense selling pressure today following what was a horrendous night for commodities markets.

Copper, iron ore, zinc and lead were among the resources impacted, but oil was by far the most impacted. According to The Australian Financial Review, Brent Crude, which is the global benchmark, dropped to a fresh 11-year low after sliding 5.5% to US$34.38 a barrel, while US crude futures were reportedly down 4.6% to US$34.31 a barrel.

Woodside Petroleum Limited (ASX: WPL) and BHP Billiton Limited (ASX: BHP) have both been smashed as a result, their shares falling 3% and 2.8% respectively. Other, smaller players have been hit even harder, with Santos Ltd (ASX: STO), Oil Search Limited (ASX: OSH) and Sundance Energy Australia Ltd (ASX: SEA) all losing between 3.3% and 5.7%.

Energy retailer Origin Energy Ltd (ASX: ORG) also fell 5.5%, while Liquefied Natural Gas Ltd (ASX: LNG) shares were down 7.1% shortly after midday.

Indeed, oil prices have fallen more than 60% since mid-2014, partially because of weaker demand for the resource but mostly due to oversupply. This was exacerbated when OPEC – or the Organisation of Petroleum Exporting Countries – refused to lower its production ceiling.

Growing stockpiles once again appear to be behind the latest fall, combined with worsening relations between Saudi Arabia and Iran, which are both members of the OPEC oil cartel. Because Saudi Arabia is, by far, the most powerful member of OPEC, it is feared that these tensions will reduce the chance of agreement and compromise between OPEC nations. Thus, a reduction in production seems even less likely now.

The Australian Financial Review recently warned investors in the sector of a “wild ride” through the first half of 2016, which could see oil prices fall even below their current level. Some analysts are suggesting a fall to around US$20 a barrel, which would put companies within the sector under even more pressure than they’re currently experiencing.

Of course, they’re only forecasts – oil prices could also rebound strongly over the coming months! But there are strong headwinds that investors need to keep in mind before even considering a move into the sector.

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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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