Why the oil price tanked overnight

Oil prices were hammered again overnight and are once again acting as a drag on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) today.

Oil prices fell earlier in the week as well, before mostly recovering. Brent oil, which is the global benchmark, was fetching roughly US$49 a barrel again yesterday afternoon, but plunged around 5% again overnight. The resource is now trading for just US$46.49 a barrel, with West Texas Intermediate (WTI) crude worth slightly less at US$45.26 a barrel.

Indeed, concerns related to global growth prospects in the aftermath of Britain’s ‘Brexit’ vote have impacted oil prices over the last fortnight, but last night’s fall is believed to have been caused by a report from the US government.

According to The Australian Financial Review, the report showed that US stockpiles of the resource were mostly within analysts’ forecasts, falling 2.2 million barrels for the week. However, market bulls may have been hoping for even larger declines to bring the market back towards equilibrium.

Meanwhile, it’s also worth noting that summertime in the United States typically results in a peak in demand for gasoline as people go on holiday. That hasn’t happened this year, according to The Wall Street Journal, because refineries have already been running hard for months producing gasoline, so there is plenty of supply which has kept the level above average for this time of year.

Shares of BHP Billiton Limited (ASX: BHP) have come under pressure as a result of the fall, losing 2%. Liquefied Natural Gas Ltd (ASX: LNG) has also lost 2%, while Origin Energy Ltd (ASX: ORG) and Santos Ltd (ASX: STO) have shed 2.6% and 2.8%, respectively.

Despite a couple of jolts this week, oil prices do appear to have stabilised in recent months which will give investors in the sector some confidence. Before considering buying into the energy producers, however, it is important that investors do their due diligence on the strength of the miners themselves.

After all, the oil price is still significantly below its levels from 2014 which mightn’t bode too well for some of the more highly leveraged producers, while there is also no guarantee that oil prices will be sustained around these levels.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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