Oil prices continued their rapid descent overnight, falling for the fifth time in six days on concerns regarding demand from China.
Indeed, the resource has been under enormous pressure over the last year as a result of a severe oversupply in the global market. This is largely due to the Organisation of Petroleum Exporting Countries, or OPEC, refusing to reduce the limit on their crude supplies, as well as the United States which has boosted its own production.
At the same time however, demand for the resource has been falling, mostly due to the economic slowdown in China. This has elevated concerns that the global oversupply situation will worsen, forcing oil prices lower with the International Energy Agency predicting that crude stockpiles won't diminish until the second-half of 2016.
Overnight, Brent crude, which is considered the global benchmark, fell 3.2% to US$46.49 a barrel while West Texas Intermediate, considered the US benchmark, dropped 1.4% to US$44.00 a barrel.
Australia's public energy and gas companies suffered as a result, with Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) falling 1.6% each. Meanwhile, Origin Energy Ltd (ASX: ORG) and AWE Limited (ASX: AWE) dropped 1.4% and 5.5% with Liquefied Natural Gas Ltd (ASX: LNG) one of the few companies trading in the black. It rose 4.2%, but only after yesterday's 17.3% decline.
Making matters worse, oil prices are expected to continue declining over the coming months, and maybe even years. Goldman Sachs, for instance, believes it could fall to near US$20 a barrel. As quoted by The Australian Financial Review, the Wall Street firm said, "While not our base case, the potential for oil prices to fall to such levels… is becoming greater as storage continues to fill."
Given the uncertainty surrounding the resource, investors may be wise to hold off from moving into the sector just yet. Investors who are heavily exposed to the sector may also want to take some time to assess their current holdings with the idea of diversifying their risk, and instead focus on some of the other compelling opportunities currently presenting themselves elsewhere.
