Oil is considered as the lifeblood of industrialised nations. The precious resource is what keeps the world running. However, in recent times, the price of oil has tanked due to the severe impact of COVID-19 on world economies.
Global traffic has come to a standstill with international travel restricted, logistical supply chains disrupted and passenger movement slowed. With no near end in sight, this has affected ASX energy shares such as BHP Group Ltd (ASX: BHP), Woodside Petroleum Limited (ASX: WPL), Origin Energy Ltd (ASX: ORG), Oil Search Limited (ASX: OSH), and Senex Energy Ltd (ASX: SXY) among others.
So, let's take a look at oil and its price movements impacting on ASX energy shares.
What are the main types of crude oil?
The type of crude oil generally depends on the geographical location of the oil field and the characteristics of the oil itself. While there are more than 160 different types of oil traded on the global market, two primary types of crude oil serve as a global benchmark for oil prices. West Texas Intermediate and Brent crude. They can be distinguished as follows:
West Texas Intermediate (WTI)
- Sourced from oil fields in the US
- Cheaper to produce than Brent Crude
- Lighter due to low density and low sulphur content
Brent crude
- Sourced from the North Sea between the Shetland Islands and Norway
- Popular to refine into diesel fuel and gasoline
- More expensive than WTI
Oil price fluctuations
Oil prices are predominately driven by three factors: current supply, future supply and demand.
Over the past few decades, oil prices have soared and plummeted amid various economic crises, natural disasters and political adventures around the globe.
From the onset of the coronavirus pandemic, the spot price for oil significantly dropped. As demand for the black gold waned, this caused a large fall on the broader ASX market. Tensions rose between OPEC nations amidst the fallout, which led to a pricing war.
The price of a barrel of WTI went in negative territory for 2 days in April. This was a first in history. These past few months however, the prices of Brent crude and WTI have somewhat recovered and can be today fetch US$46.07 and US$43.12, respectively (at the time of writing).
What does this mean for ASX energy shares?
ASX energy shares have not been spared in the oil market bloodbath. The ASX's largest oil producer, Woodside has seen its share price fall almost 50% since its 52-week high. Oil Search has fared much worse, down 60% from its year-high in January.
Other companies such as BHP, Origin and Senex have also seen their share price tumble. However, because of their portfolio diversification in the resources sector, the energy giants have managed to largely escape the brutal sell-off.
Foolish takeaway
No one could have predicted the spot price of oil crashing below zero. Indeed COVID-19 has severely reduced oil demand around the world. However, oil is still vital in almost every industry and is used as a by-product in everyday lives.
I believe that oil demand will outstrip supply within the next 12 months, and thus ASX energy share prices will rebound to pre-pandemic levels. Now could be a good time for a patient investor to pick up these beaten down ASX energy shares.
