Oil shares spilled as S&P/ASX 200 tumbles

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has dropped 1.5% to 4,921.5 heading into the close of trade on Tuesday, led by energy and resources shares.

The big four banks were also dragging on the index, given a number of recent woes.

But a slide in oil prices overnight to US$38.01 a barrel, and further falls today – Brent crude is currently at US$37.64 a barrel – have taken their toll on Australia’s largest oil and gas producers.

Santos Ltd (ASX: STO) has seen its share price plunge 4.9% to $3.57, while Woodside Petroleum Limited (ASX: WPL) is down 4.1% and BHP Billiton Limited (ASX: BHP) has seen its share price sink 3.3% to $15.97.

Santos shares have now lost 12% in the past 5 days, BHP’s share price has dropped 3.9% and Woodside’s share price is down 9.8%. All of that is on the back of sliding oil prices.

Investors appear sceptical that a global agreement on oil-production levels will be reached in Doha, Qatar on April 17, after Saudi Arabia said it would only freeze production if Iran did as well. US crude oil prices suffered heavily, falling 3% to US$35.70 a barrel overnight. Iran recently said it would increase production and exports until it reached a favourable market position.

Both OPEC (Organisation of the Petroleum Exporting Countries) and non-OPEC oil producing countries are meeting in Doha to discuss a solution to fix the global oil oversupply issues. Russia has never agreed to production freezes ever and is unlikely to do so now, while Saudi Arabia is still trying to grab market share, according to some analysts. Notably, the US is not attending.

The problem for many oil-producing nations is that they are cash-starved and low oil prices represent a catch-22 situation. They can’t risk freezing production because of the low prices, and really need to increase production to generate more revenues. RBC

However, freezing production levels might see oil prices recover somewhat, but it would mean taking the risk that prices don’t recover, and 5 countries, Algeria, Iraq, Libya, Nigeria and Venezuela are reportedly at risk of imminent collapse if oil prices don’t recover quickly according to RBC Capital Markets.

Foolish takeaway

The other problem facing oil-producing nations is that if oil prices rise, higher-cost oil production that has left the market will be able to re-enter it, putting more downward pressure on oil prices.

Investors might want to consider looking outside the energy sector, with major downside risks ahead.


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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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