At time of writing, the share prices of Woodside Petroleum Ltd [ASX:WPL], Oil Search Ltd [ASX:OSH] and Beach Energy Ltd [ASX:BPT] are all down today.
Of these stocks, Beach Energy is the one suffering the most, down 4.8% and trading at $1.59.
Over the last month, these three stocks have been hurt, and as of today they are experiencing some steep falls:
Why the steep fall?
The main thing that drives these three stocks’ performance is the price of oil.
These stocks rise and fall on the price of oil and as you can see there is a very strong correlation between these stocks and the price of oil over the last year:
In this chart we see WTI oil (blue) matching up closely with Woodside and Oil search, with Beach Energy outperforming, but still correlated strongly.
This is partly due to Beach Energy’s strong year underpinned by a 92% increase in sales revenue and a 108% increase in operating cash flow.
Beach Energy is also the smallest of the three with a market cap of $3.8 billion.
To understand the steep fall in the last 24 hours, a couple things need to be unpacked.
Firstly, the 5% fall in the price of oil came as Saudi Arabia pledged to boost oil output.
Combined with investors fearing a slowdown in global growth, oil has fallen to a two-month low.
Secondly, crude oil inventories in the US have increased by 9.88 million barrels for the week ending October 19.
In simple terms, demand weakens as the US has more oil on hand already.
Looking ahead, where do oil and ASX oil stocks go?
Forecasting is not easy as oil production is tied to unpredictable world events as well as global growth.
Below we have a chart which shows how oil prices interact with these two things since 2001:
So, as you can see, if you are investing in oil stocks on the ASX a lot depends on how you think events will go.
Are you bullish and see continued growth and increasing conflict?
Or are you a bear and see slowing growth and reduced conflict?
One scenario sees growth slowing but increased conflict.
This could mean that oil trades sideways for a couple years around the $65–$70 range.
Whatever you do, you need to stay in the loop with global affairs to give yourself the best chance of turning a profit.
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