Are oil prices headed under US$40 a barrel?

Headwinds are growing for oil prices

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published July 26, 2016 10:57 am AEST

Oil prices are sinking again, falling to a new three-month low as oversupply fears grow.

Brent crude dropped 2.2% overnight to US$44.67 a barrel, while West Texas Intermediate (WTI) fell to US$42.97 a barrel – the lowest level since March 2016, according to Reuters.

US oil inventories rose by 1.1 million barrels in the week to July 22, and data from market intelligence firm Genscape also showed that US production had increased. As broker Morgan Stanley said in a note to clients, "Supply continues to return from disruptions, refined products are severely oversupplied, crude demand is falling well short of product demand, and key product demand is decelerating."

Drill rig counts from Baker Hughes also suggest that the recent recovery in oil prices had led to shale drillers jumping back into the market. US drilling rigs were at 462 at July 22, up 15 from a week earlier and the fourth week in a row. Canadian drilling rigs were also higher at 102 – up 7 from July 15.

That also suggests that oil prices could see sustained falls with growing oil inventories, and some analysts are already paring back their forecasts. Mizuho Securities USA cut its price target to US$40 a barrel from US$45 a barrel.

No wonder oil stocks on the ASX are getting hit in early trading…

Santos Ltd (ASX: STO) has dropped 3.8% to $4.495
Liquefied Natural Gas Ltd (ASX: LNG) is down 3.7% to 66 cents
Sundance Energy Australia Ltd (ASX: SEA) is down 3.3% to 14.5 cents
Origin Energy Ltd (ASX: ORG) share price has fallen 2.9% to $5.77
AWE Limited (ASX: AWE) is down 2.2% to 89.5 cents
Karoon Gas Australia Limited (ASX: KAR) is down 1.9% to $1.325
BHP Billiton Limited (ASX: BHP) is down 1.3% to $18.99
Australia's largest independent oil and gas producer Woodside Petroleum Limited (ASX: WPL) is down 1.2%
Oil Search Limited (ASX: OSH) is down 1.2% to $7.18

Another headwind the commodity faces is that the US dollar has also risen over the past month.

Foolish takeaway

Oil prices look set to fall further and we could see a sub-US$40 a barrel price before the end of this year.

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