The S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO) made a surprising rebound today but the energy sector hasn't been invited to the party.
ASX-listed oil and gas producers are lagging on worries that the oil price could slip tumble to US$20+ a barrel or even touch US$10 per barrel.
London-based FACTS Global Energy is warning clients that it's "already looking almost certain" that the Brent oil benchmark will soon have a "2" in front of it, reported the Australian Financial Review.
Is the oil price tanking to under US$10?
Further, the consultancy thinks the chance of the Brent price falling single-digit territory is looking pretty inevitable unless oil producing giants Russia and Saudi Arabia can kiss and make up.
The two countries are flooding the market with excess supply and cutting prices to customers after Russia refused to extend production quotas in concert with OPEC.
But if you asked me, both countries are really targeting US shale producers. They can't be seen as openly attacking the US and offending US President Donald Trump – especially not Saudi Arabia.
Gas projects under threat
The Brent price dipped under US$30 a barrel before recovering a little to trade at US$30.58 a barrel at the time of writing. The last time oil fell under US$10 was in 1998!
The oil price plunge is very bad news for Australian energy stocks even though the more significant names in the sector are producing liquefied natural gas (LNG) and not condensate. The problem is LNG prices tend to follow crude prices with a three-month lag.
A low oil price will threaten the viability of Woodside Petroleum Limited's (ASX: WPL) $16 billion Scarborough LNG project in Western Australia and Santos Ltd's (ASX: STO) $7 billion Barossa gas project off the north coast. The AFR reports that both projects are up for a final investment decision (FID) later this year.
Buying opportunity
While FACTS forecasts are very alarming, it isn't widely shared by other commodity analysts. Credit Suisse for one believes the oil price will recovery due to fundamentals but is telling investors to be prepared for oil to stay under US40 a barrel for a year
"In our view, the recent sell-off enables a rare opportunity to accumulate energy positions at discounts, but the situation remains uncertain and things could still get worse before getting better (even dropping below US$20/bbl)," said the broker.
"Given the possibility of sustained low prices lasting into 2021, we prefer names which can capture upside if oil recovers, but are also resilient to sustained lower oil."
Top 2 ASX energy stocks to buy
Energy stocks with a healthy balance sheet should also be able to take advantage of opportunistic acquisitions that the coronavirus bear market will throw up. Several oil companies may be forced to sell assets on the cheap to raise badly needed cash.
There are two ASX stocks that stand out as being key picks, according to Credit Suisse. These are Woodside petroleum and Beach Energy Ltd (ASX: BPT).
