Oil prices crash lower on supply glut concerns

It wasn’t that long ago that many experts were tipped oil prices to break through the US$100 a barrel mark this year.

Well, I think it is fair to say that this is extremely unlikely now after prices sank to a one-year low overnight.

According to Bloomberg, the WTI crude oil price has plunged 8.3% lower to US$54.95 a barrel and the Brent crude oil price has sunk 7.6% to US$64.81 a barrel. This is the biggest one-day drop in over three years.

Prices have been hit hard due to concerns of excess supplies, President Trump’s criticism of the world’s biggest crude exporter on Twitter, and a darkening demand outlook. In respect to the latter, OPEC downgraded its 2019 demand forecast for the fourth time in as many months overnight.

This latest downgrade means traders are worried that “a supply glut similar to the price-killing surplus of 2014 is redeveloping” according to the Bloomberg report.

And it doesn’t look like the market is expecting a quick fix. Data from the Commodity Futures Trading Commission reveals that combined bullish positions in WTI and Brent sank to their lowest levels in 14 months last week, whereas short positions are on the rise.

What now?

While the fall in oil prices is likely to be great news for the likes of Qantas Airways Limited (ASX: QAN), Virgin Australia Holdings Ltd (ASX: VAH), and local petrol prices, energy shares are likely to come under pressure today.

This could make it a tough day of trade for the likes of Beach Energy Ltd (ASX: BPT), BHP Billiton Limited (ASX: BHP), Cooper Energy Ltd (ASX: COE), Oil Search Limited (ASX: OSH), Santos Ltd (ASX: STO), and Woodside Petroleum Limited (ASX: WPL).

Should you buy the dip?

If these energy producers do fall heavily today, it may be tempting for investors to buy the dip. However, I would suggest investors keep their powder dry and wait to see what OPEC does at its meeting next month.

If the oil cartel doesn’t cut production then prices could remain lower for longer and put even more pressure on the prices of Australian energy shares.

Instead of risking your money on energy shares, I think these top blue chip shares would be far better investment options.

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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.

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