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Are oil prices headed under US$40 a barrel?

Oil prices are sinking again, falling to a new three-month low as oversupply fears grow.

Brent crude dropped 2.2% overnight to US$44.67 a barrel, while West Texas Intermediate (WTI) fell to US$42.97 a barrel – the lowest level since March 2016, according to Reuters.

US oil inventories rose by 1.1 million barrels in the week to July 22, and data from market intelligence firm Genscape also showed that US production had increased. As broker Morgan Stanley said in a note to clients, “Supply continues to return from disruptions, refined products are severely oversupplied, crude demand is falling well short of product demand, and key product demand is decelerating.”

Drill rig counts from Baker Hughes also suggest that the recent recovery in oil prices had led to shale drillers jumping back into the market. US drilling rigs were at 462 at July 22, up 15 from a week earlier and the fourth week in a row. Canadian drilling rigs were also higher at 102 – up 7 from July 15.

That also suggests that oil prices could see sustained falls with growing oil inventories, and some analysts are already paring back their forecasts. Mizuho Securities USA cut its price target to US$40 a barrel from US$45 a barrel.

No wonder oil stocks on the ASX are getting hit in early trading…

  • Santos Ltd (ASX: STO) has dropped 3.8% to $4.495
  • Liquefied Natural Gas Ltd (ASX: LNG) is down 3.7% to 66 cents
  • Sundance Energy Australia Ltd (ASX: SEA) is down 3.3% to 14.5 cents
  • Origin Energy Ltd (ASX: ORG) share price has fallen 2.9% to $5.77
  • AWE Limited (ASX: AWE) is down 2.2% to 89.5 cents
  • Karoon Gas Australia Limited (ASX: KAR) is down 1.9% to $1.325
  • BHP Billiton Limited (ASX: BHP) is down 1.3% to $18.99
  • Australia’s largest independent oil and gas producer Woodside Petroleum Limited (ASX: WPL) is down 1.2%
  • Oil Search Limited (ASX: OSH) is down 1.2% to $7.18

Another headwind the commodity faces is that the US dollar has also risen over the past month.

Foolish takeaway

Oil prices look set to fall further and we could see a sub-US$40 a barrel price before the end of this year.

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After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks - No credit card required.

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

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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