Oil prices plunged overnight despite an agreement from the world's largest oil cartel to extend its production cuts for another nine months.
At the time of writing, Brent oil, the global benchmark, was trading for US$51.29 a barrel, down 5.6% compared to around 4:00pm yesterday afternoon (Sydney time). Crude oil prices have also fallen more than 5%.
The big move in oil prices overnight have flowed through to the share market in the energy sector today. Indeed, the BHP Billiton Limited (ASX: BHP) share price, the Woodside Petroleum Limited (ASX: WPL) share price, the Santos Ltd (ASX: STO) share price, and the Origin Energy Ltd (ASX: ORG) share price have all fallen between 2% and 3% so far.
Indeed, oil prices have remained volatile for some time. Although they have rebounded from the low levels hit in early 2016, oil is still trading for about half the price it was three years ago. This is due to both supply and demand factors, with growth in demand slowing (and that could continue with the rise of renewable energies).
In an effort to forestall an oil price collapse, members of OPEC (Organisation of Petroleum Exporting Countries) agreed to extend oil production cuts through to March 2018, contributing less to the global supply. However, shale operators in the United States are able to accelerate production levels when the price rises to around US$52, according to The Australian Financial Review, thus offsetting the effectiveness of OPEC's production cuts.
As for the heavy decline in oil prices, it's possible investors had been hoping for deeper production cuts, as opposed to simply extended. As indicated above, it's also becoming increasingly clear that OPEC may be losing some of its power in the market, setting in place even more uncertainty for the industry's future.
Although some investors may take this as an opportunity to buy into the sector in the hope of a rebound, I'll be watching on from the sidelines.
