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Why ASX 200 oil stocks are on a slippery slope as a number of records are broken

Our energy shares on the ASX are under pressure today as the oil market recorded a number of multi-year firsts that’s adding to the gloomy outlook for the commodity.

This sour mood among our oil & gas stocks stand in contrast to the bargain hunting that has lifted the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index today despite the big sell-off on the US S&P 500 overnight.

The Woodside Petroleum Limited (ASX: WPL) tumbled 1.7% to a fresh eight-month low of $31.01 in the final hour of trade while Santos Ltd’s (ASX: STO) share price surrendered 0.8% to $5.60, Oil Search Limited’s (ASX: OSH) share price fell 1.2% to $7.30 and Beach Energy Ltd’s (ASX: BPT) share price gave up early gains to be flat at the time of writing.

News that the Organisation of the Petroleum Exporting Countries (OPEC) and friends meeting had failed to yield an agreement on production cuts for the first time in nearly five years sent the Brent crude price tumbling by as much as 5.2% to US$58.36 a barrel, according to a report on Bloomberg.

Is OPEC changing?

Interestingly, it’s Russia that is refusing to curb production in spite of a push by OPEC heavyweight Saudi Arabia to cut output by a million barrels per day.

US President Donald Trump has been putting pressure on the Arabian kingdom to keep the spigots fully open to drive down oil price and it was thought that Trump had leverage over the Saudi Arabia from the alleged murder of journalist Jamal Khashoggi.

The global oil price had received a big boost for most of the past year or more as Russia teamed up with OPEC to co-ordinate supply of crude.

While Russia had in principle agreed to a one-million-barrel reduction across the group, it is refusing to make any substantial reduction in its own production this time.

This raises questions about whether the cartel plus Russia will remain a uniting bloc as the latter experts its influence over OPEC.

Russia is a major oil producer and experts believe this development marks a fundamental change in the relationship between the country and OPEC.

Why forecasting oil prices just got harder

Coincidentally, news that the US has become a net exporter of crude for the first time in 75 years is also adding to the pessimism.

US shale producers have been stepping up production in the face of the relatively high global oil price and the country has become the biggest swing factor for oil markets outside of OPEC plus friends.

Unlike many other commodities, crude prices are driven more by geo-politics than by fundamentals and this isn’t likely to change anytime soon.

This makes forecasting the oil price much more difficult and is one of the reasons why I’ve held back on going overweight on the sector even though I am overweight on mining stocks and believe the fundamentals for oil are positive.

Having said that, Goldman Sachs is particularly bullish on oil for 2019 – and the broker probably knows something I don’t.

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Motley Fool contributor Brendon Lau 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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