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A second headwind hitting ASX energy stocks apart from coronavirus

Brendon Lau
Man broker stock market crash crisis concept

ASX energy stocks are likely to come under pressure this morning as the oil price got hit on two fronts over the weekend.

Infighting between OPEC and friends are adding to the gloom at a time when the commodity is succumbing to fears that the coronavirus will sap demand for oil.

The West Texas Intermediate (WTI) oil price benchmark slumped 1.2% to US$50.32 a barrel while the Brent index shed 0.8% to US$54.47 per barrel.

Oil sector under more pressure

This is likely to weight on our energy majors on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index. This includes the Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO) share prices.

The S&P/ASX 200 Energy (Index:^AXEJ) (ASX:XEJ) index is already lagging the broader market this year as it tumbled 4% when the ASX 200 is up 5%. The disagreement among major oil exporters could see the sector fall further than miners, which have also been hit by the virus scare.

This is because investors had been banking on OPEC and Russia to act to support the oil price but CNN reported that Russia is pushing back on plans to lower production to keep the market in balance.

OPEC+ becoming a minus

OPEC’s key member, Saudi Arabia, is proposing the bloc including Russia cuts production but Russia said it needed more time to study the recommendations from OPEC’s technical committee and to assess the impact of the SARS-like virus on the market.

OPEC and friends have always been ready to stand together to support global oil prices when the industry came under attack before. This time, investors’ confidence is shaken as fractures appear within the group.

The common epicentre for oil and the virus

China being ground-zero for the coronavirus is also a headache for the oil market. The world’s second largest economy is the biggest importer of oil and is arguably the single biggest determiner of crude prices.

According to the latest headlines, the coronavirus has claimed 904 lives and have infected over 30,000 people – most of whom are in China.

The country has essentially gone into lockdown and the streets and malls in its busiest megacities are eerily empty.

Foolish takeaway

It doesn’t help that experts cannot agree on when the worst will pass for the growing epidemic. The inability for OPEC+ (the term used to include Russia who isn’t formally in the cartel), to stand together to meet this challenge is a further blow.

But there’s little doubt in my mind that authorities will be able to contain the virus – there’s just too much at stake here. This means the sell-off is a buying opportunity for those willing to overlook the shorter-term volatility.

The post A second headwind hitting ASX energy stocks apart from coronavirus appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020