Will oil prices fall to US$10?

Plummeting oil prices have been one of the catalysts behind crashing equity markets around the globe so far in 2016, and the situation doesn’t look like improving anytime soon.

Oil prices fell almost 7% on Monday night, and another 2.4% on Tuesday night. One barrel of Brent crude is now worth less than US$31, while West Texas Intermediate ended at US$30.44 a barrel, although both fell into the US$20s at one point during the session. Neither Brent crude nor WTI crude have traded at these levels in at least 10 years.

It’s worth noting that several economists have forecast a drop to US$20 a barrel, which would indicate oil could still lose a third of its value before bottoming out. Of course, that would be devastating for companies like Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and even BHP Billiton Limited (ASX: BHP), which are all already feeling the heat.

But, as highlighted by The Australian Financial Review, one commodities researcher has now gone so far as to suggest oil prices could fall to just US$10 a barrel “before most of the money managers in the market conceded that matters had gone too far.”

It is believed that while excess supply and diminishing demand has driven the oil rout for the last 16 months or so, prices are now being driven by a tumbling Chinese yuan and an appreciating US dollar, combined with fears over a potential global economic crisis. These factors could drive oil prices towards that US$10 level.

In saying that, forecasting commodity prices is impossible to do with any accuracy, and The AFR noted that the researcher considered his US$10 a barrel case as “extreme”.

Regardless of whether it does fall that low however, most commodities experts do consider it likely that there will be further downwards pressure on the price of oil which could lead to further losses in the resources sector. For that reason, investors may want to ignore the falling share prices of energy producers and focus their attention on other sectors not so heavily exposed to those risks.

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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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