Australian energy shares such as Beach Energy Ltd (ASX: BPT), Oil Search Ltd (ASX: OSH), and Santos Ltd (ASX: STO), and Woodside Petroleum Limited (ASX: WPL) could come under pressure on Tuesday morning.
This follows a sharp decline in oil prices during overnight trade on Wall Street.
While energy shares were out of form on Monday, particularly the Oil Search share price after the exit of its CEO, these declines look likely to be extended during today’s session after oil prices sank as much as 8% overnight.
According to Bloomberg, the WTI crude oil price has sunk 7.6% to US$66.34 a barrel and the Brent crude oil price has tumbled 6.9% to US$68.52 a barrel.
Why are oil prices sinking?
Traders have been selling oil after a surprise announcement out of OPEC on Sunday. That announcement revealed that the oil cartel has agreed to remove all production cuts by September 2022.
According to CNBC, the group of 23 nations have agreed to increase production by 400,000 barrels per day each month from August. This means that by September 2022, the entirety of the almost 6 million barrels per day of oil being withheld will be back on the market.
Some analysts believe the news isn’t as bad as it appears. RBC’s Helima Croft told CNBC: “This was a renewal of OPEC+ vows. We think the market can absolutely absorb the additional 400,000 barrels per month…this is a constructive agreement.”
Goldman Sachs commented: “We view [Sunday’s] deal as supportive to our constructive oil price view with supply increasingly becoming the source of the bullish impulse and evidence of non-OPEC supply shortfalls likely in the coming months.”
In addition to this, the report reveals that the team at Credit Suisse has raised its oil price forecasts for the year. Its analysts are now expecting Brent crude oil to average US$70 per barrel in 2021, up from US$66.50 per barrel previously. It also boosted its WTI crude oil price forecast by US$5 per barrel to an average of US$67 per barrel in 2021.
Citi is even more positive, it said: “The summer season for petroleum markets should be stronger than usual this year on pent-up leisure demand.” It expects Brent and WTI to climb to US$85 per barrel or higher this year.
In light of the above, the recent weakness in energy shares could yet prove to be a buying opportunity for investors.