Most sectors are wallowing in the red today but oil and gas stocks are among the worst hit as crude prices came under pressure last night after a surge in US oil inventories.
The Beach Energy Ltd (ASX: BPT) share price copped a 4% beating to $2.08 in after lunch trade while the Oil Search Limited (ASX: OSH) share price tumbled 1.8% to $7.68 and Santos Ltd (ASX: STO) share price shed 1.2% to $7.11.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lost 0.7% of its value and only defensive sectors like utilities and healthcare are in the green.
What's eating oil markets
It's not only the lack of risk appetite that is hurting ASX energy stocks. A bigger than expected jump in US oil inventories to its highest since September 2017 is also weighing heavily in the sector.
The U.S. Energy Information Administration said oil inventories in the world's largest economy rose by almost 10 million barrels last week to 470.6 million barrels, according to Bloomberg.
The news drove crude oil prices lower in overnight trade despite the threat of a civil war in oil producing nation Venezuela, the sudden enforcement of US sanctions against Iranian oil and the reluctance to increase production by the Organization of the Petroleum Exporting Countries (OPEC).
It was only last week that crude hit a six-month high but a week is a long time in commodity markets and our energy stocks are getting whiplashed from the volatility.
Oil bears are emboldened by the US inventory build, which was well above the 1.5 million increase that experts were predicting.
What's more, US shale oil product hit a record high of 12.3 million barrels of oil per day!
Is this time to sell oil stocks?
But I don't expect oil to tumble much lower, not in this geo-political climate. Venezuelan opposition leader Juan Guaido called his fellow citizens to stage an armed uprising to overthrown President Nicolas Maduro.
The violence won't be over anytime soon and is likely to disrupt oil exports from the country. The struggle for power between Guaido and Maduro is playing out like a conflict between east and west with the US and Australia backing Guaido and Russia and China supporting Maduro.
This almost guarantees the unrest will take longer to resolve than otherwise.
The fluid situation confronting the oil market is the key reason why I favour miners over oil and gas producers. It's much harder to predict where crude is going as it's more impacted by global politics than other commodities such as iron ore or copper.
This isn't to say investors shouldn't have exposure to ASX energy stocks. It's just that longer-term investors need a stronger stomach – or know how and when to look away.
