Oil price plunges and takes Santos Ltd shares down with it

Oil futures took a bath overnight after U.S. government data showed the nation’s crude inventories ballooned to another record high in a sign that the oil market has not fixed its oversupply problems.

As a result of the data oil prices plunged 5% with WTI futures selling for US$50.51 and Brent crude futures at US$53.12 this morning, although that is still nearly double the lows the oil price hit in January 2016 on worries of a global supply glut.

In response to the oversupply problems the group of oil-producing nations led by Saudi Arabia known as OPEC agreed to cut supply from January 2017 in an effort to support prices with other major producers such as Russia on board.

However, as I have written before it seems there are multiple reasons that the writing may be on the wall for lower oil prices over the medium term.

These include the rise of U.S. shale oil and the increasingly sophisticated extraction technologies for example being used across the Permian Basin in Texas.

Other factors painting a bearish picture for oil prices include, the rising US dollar, the shift to cleaner transport modes in the developed world, government support for renewable energy, and the fact that the Saudis themselves are now looking to sell off their oil assets via an IPO of the Kingdom’s Saudi Aramco company.

If those aren’t enough reasons to be bearish on the oil outlook consider that new U.S. president Trump is likely to deregulate the sector in in an effort to encourage investment and exploration to support U.S. energy self sufficiency.

Time to sell?

Today the Santos Ltd (ASX: STO) share price is down 3% to $3.55 as it remains a high risk play due to its substantial debt load, while others with healthier balance sheets including Origin Energy Ltd (ASX: ORG), Oil Search Limited (ASX: OSH) and Woodside Petroleum Limited (ASX: WPL) are down 1.6%, 1.6% and 1.5% respectively.

I don’t like the outlook for these energy businesses over the medium term and expect oil prices could come under more pressure over the course of 2017 and beyond.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

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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