Australia’s leading energy producers including Oil Search Limited (ASX: OSH), Santos Ltd (ASX: STO), and Woodside Petroleum Limited (ASX: WPL) are likely to see their shares sink lower on Thursday after oil prices crashed overnight.
According to Bloomberg, the WTI crude oil price sank 4.4% to US$70.88 a barrel and Brent crude oil dropped 6% to US$74.30 a barrel.
Why are oil prices crashing?
Oil prices came under heavy selling pressure after Saudi Arabia increased its oil output in June to the highest level seen in over 18 months.
Saudi Arabia increased production by a massive 400,000 barrels per day in June as it sought to cool the market following a surge in oil prices that led to three-and-a-half-year highs being reached recently. Prices had been on a tear after production dropped from some members of OPEC.
In addition to this, there are concerns that the escalating U.S.-China trade war could threaten economic growth.
On Wednesday the United States Trade Representative advised that the Trump administration has stated its intention to place 10% tariffs on an extra US$200 billion worth of Chinese imports. The White House made the announcement after the Chinese government retaliated to last week’s US$34 billion trade tariff.
How severe will the declines be?
Over in London the UK-listed shares of BHP Billiton Limited (ASX: BHP) fell 3% overnight as investors hit the sell button in a panic.
And in the United States the energy sector fell 2.4%, erasing much of its recent gains.
Should you buy the dip?
While I think any sizeable decline in the BHP Billiton share price could be a buying opportunity, I wouldn’t be in a rush to buy any pureplay oil producers.
Prior to today I felt many of the leading energy producers’ shares had been priced as though oil prices were going to remain at these lofty levels for some time to come. But with weakness being shown in prices now, the energy producers could face a reality check.
In light of this, I would suggest investors look elsewhere for investment opportunities at this stage.
Instead of energy shares I would be buying these mid cap growth shares.
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Motley Fool contributor James Mickleboro has no position in any of the 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 Scott Phillips.