What happened? Many of Australia's major oil and gas producers, including Santos Ltd (ASX: STO), Oil Search Limited (ASX: OSH), Origin Energy Ltd (ASX: ORG), Woodside Petroleum Limited (ASX: WPL) and Beach Energy Ltd (ASX: BPT), experienced share price falls in excess of 2% this morning, compared with only a 0.3% fall in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
Why? As you might have guessed, the benchmark WTI oil price fell nearly 1.5% on Friday to close below US$60 per barrel again. The WTI oil price is primarily a US-based measure and appears to have stabilised around the US$60 mark following a savage plunge from over US$100 to below US$50 per barrel in the space of six months last year.
The price is important for oil and gas producers alike as many Australian LNG producers have supply contracts linked to the global oil price, however the appropriateness of this is currently being debated.
Woodside Petroleum for instance, has primarily oil-price linked LNG contracts with prices that lag six-months behind the current oil price. This is part of the reason why the profits (and share prices) of LNG producers have fallen less (so far) than oil producers like Santos and Oil Search.
What now? Very little has changed for Australian oil and gas companies and their subcontractors like Worleyparsons Limited (ASX: WOR) and Cimic Group Ltd (ASX: CIM); times remain tough and are expected to stay that way for some time yet. The day-to-day reporting of oil price fluctuations has a back seat for now but traders remain on edge for sharp swings in global commodity prices.
If I were investing in companies with operations dominated by LNG, such as Woodside, I would be thinking long and hard about the value in keeping the holding during the upcoming reporting season. I believe we're going to see dividends slashed and profit fall short of where many investors were hoping, resulting in capital losses that could take some time to recoup.
