It has been a tough start to the day for ASX 200 energy shares such as Santos Ltd (ASX: STO) and Woodside Energy Group Ltd (ASX: WDS).
The energy sector is a sea of red on Tuesday after oil prices crashed overnight.
What happened to oil prices?
Both Brent crude oil and WTI crude oil dropped as much as 6% during Monday night's session. In fact, this was the biggest decline recorded by US crude oil in more than two years.
According to CNBC, U.S. WTI futures dropped 6.1% to close at US$67.38 per barrel for its biggest daily loss since 12 July 2022, when the benchmark lost 7.9%. Whereas futures for global crude benchmark Brent slid 6.1% to settle at US$71.42 per barrel.
The catalyst for this was Israel's decision to steer clear of oil, nuclear, and civilian infrastructure locations when striking Iran. This was confirmed by Iranian oil news network Shana, which said that Iran's oil industry operation is operating as normal with no disruptions. This is good news given that Iran is estimated to account for upwards of 4% of global oil supplies.
It seems that the market had priced in a risk premium into oil prices in recent weeks and this has now quickly unravelled.
Andy Lipow from Lipow Oil Associates isn't expecting a swift recovery from oil prices. He told CNBC:
With Israel deliberately, and perhaps with some American encouragement, avoiding the targeting of crude oil facilities, the oil market is back to looking at an oversupplied market.
Oil prices will remain under pressure for the rest of this year, it may be difficult to see Brent crude oil prices reaching $80 in the foreseeable future.
Though, Bob McNally, from Rapidan Energy doesn't believe that oil markets are out of the woods just yet. He said:
Direct Israel-Iran conflict will likely persist. Israel signaled it is able and willing to target energy and nuclear targets in future strikes.
Should you buy the dip?
A number of brokers see a lot of value in both Santos and Woodside shares at current levels.
For example, the team at Morgans has an add rating and $33.00 price target on Woodside's shares, whereas Ord Minnett has a buy rating and $8.50 price target on Santos' shares.
This could make both energy shares worth considering. Though, investors should be aware that volatile oil prices mean they are higher risk options.
