Oil prices have continued to fall with West Texas Intermediate crude entering a bear market and Brent briefly tumbling below US$60 after US petroleum inventories ballooned.
As a result many Australian oil shares have been under pressure with, Woodside Petroleum Ltd [ASX:WPL] (down 0.38%) and Oil Search Ltd [ASX:OSH] (Down 0.87%), while Santos Ltd [ASX:STO] (Up 1.20%) after a new discovery.
According to Bloomberg, the WTI crude oil price dropped 3.4% to US$51.68 a barrel and the Brent crude oil price tumbled 2.2% to US$60.63 a barrel in New York overnight.
What’s caused oil prices to drop?
US government data showed the US’ total oil stockpiles grew by about 22 million barrels last week, signalling the biggest jump in since 1990. US crude production also set a record, while imports climbed.
The ballooning stockpiles have sent US crude 22% lower than its yearly peak six weeks ago. While some have been quick to blame aggressive US trade policy for stoking fears of a global economic slowdown, years of record high oil production seem a more likely candidate.
The Organization of Petroleum Exporting Countries (OPEC) have been trying to curb oil production in response to a continued decline in the price of oil. But the task of reducing the world’s oil reserve has proven difficult.
While OPEC and its partners say they will cut production, US output remains near record levels. The Saudis too will dodge any production cut should Iran’s oil customers find themselves in need.
They want to make sure that, unlike last year, the Iranian barrels have really gone before they start pumping more of their own. They have already indicated that they will meet any requests for more oil.
Russia has also been shaking in upholding any promised production cuts. Four months into the current deal, Russia’s compliance was still only around 80%, compared with 150% for the whole of OPEC (Russia isn’t an official member of OPEC).
What’s next for oil prices?
Australian oil stocks like Woodside Petroleum Ltd, Oil Search Ltd and Santos Ltd, have all come under pressure with the sliding oil price. All three have had sharp declines in share price during May, following the oil price slump.
Further cuts are now on the table from Saudi Arabia, but just how likely they are to commit is anyone’s guess.
Some are staying optimistic with UBS analysts tipping crude to rise towards $75 over the next three months due to the market being undersupplied while Societe Generale pinned its Brent oil price forecast to average $72.50 a barrel in the second half of the year.
However, with the shaky promises from OPEC to cut production, we could see crude to continue going down. Increased supply and perceptions of slowing demand growth could push levels below $50 for WTI.
For Money Morning
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