Are oil prices about to crash again?

Investors who thought the oil rout was finally over may want to think again.

After rebounding from a near 13-year low around US$27 a barrel to nearly US$36 a barrel earlier this week, many investors were lured back into the sector. This was reflected by the considerable gains recorded by the share prices of companies like Santos Ltd (ASX: STO), Senex Energy Ltd (ASX: SXY) and Woodside Petroleum Limited (ASX: WPL) in that time.

However, it looks as though those investors could again be punished for jumping back into the sector too soon after oil renewed its downwards slide. It fell almost 5% on Monday night and another 3.7% during the most recent session, with one barrel of Brent crude again valued at less than US$33.

Indeed, oil prices have suffered one of their most violent declines in history over the last 18 months or so, falling from around US$110 a barrel to their current levels – a drop of roughly 70% – as a result of a severe oversupply in the market.

Those anxieties eased over the last fortnight as investors rallied in hope that OPEC and non-OPEC producing nations could finally be on the verge of an agreement to curb supplies, but those hopes now seem dashed.

OPEC, or the Organisation of Petroleum Exporting Countries, is currently producing record amounts of oil while the supply situation could be exacerbated by the prospect of increased Iranian exports. At the same time, investors are also worried about demand levels as a result of China’s slowing industrial growth, which threatens to drag the resource’s price even lower.

Of course, if a deal can be struck between OPEC and non-OPEC producers, the price could rise considerably with some estimates suggesting a return to US$70 a barrel by 2017. However, a deal is by no means guaranteed; prices could fall lower with other forecasts suggesting a low of just US$10 a barrel.

Companies across the sector are suffering as a result of the oil crisis. Many, including Woodside Petroleum and BHP Billiton Limited (ASX: BHP) have been forced to take massive write-downs on their assets while BHP also had its credit rating downgraded by the Standard & Poor’s just yesterday.

I don’t know where the oil price will go in the near future, but it certainly seems as though there could be more pain in store for those investors exposed to the sector in the medium-term. In my opinion, the risk vs reward trade-off isn’t compelling enough at this point and investors would be wise to look elsewhere for superior opportunities.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget BHP and Woodside Petroleum! These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

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. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.