Oil Price Plunge Continues: Is $40 Next?

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: The price of crude oil continued its rapid slide today, falling over 3% to $54.07 per barrel for WTI crude and $58.90 per barrel for Brent crude. A barrel of crude is now nearly half of what it was in June when WTI crude peaked at $107.95 and Brent crude sold for $115.19.

The positive side effect of low oil prices is that gasoline is now below $2 per gallon in some parts of the country. Image owned by The Motley Fool.

So what: OPEC continues to put pressure on U.S. shale producers and countries like Russia and Venezuela by maintaining a stance of continued supply despite oil's price drop. Suhail al-Mazrouei, energy minister for the U.A.E., said OPEC wouldn't consider a supply cut just because oil might fall from $60 to $40 per barrel.

U.S. shale producers Continental Resources and Whiting Petroleum could be hardest hit because they'll likely lose money on most of their wells at $40 per barrel. After years of consolidation in the U.S. shale oil industry, these are two of the biggest producers in the country, and after years of boom time, they're faced with potential losses in 2015 if prices don't recover. I'd expect to hear them cutting back on capital spending if the rout continues.

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Now what: The oil market is oversupplied and someone has to cut production for oil prices to rise again. OPEC isn't blinking and so far neither is Big Oil or smaller producers like Continental Resources and Whiting Petroleum. That spells trouble for at least the next few months and I wouldn't be surprised to see oil hit $40 per barrel. But at that price, a lot of producers will be losing money and they'll have to cut production.

The industry will come back eventually, but no one knows when. And if my only option is betting on U.S. shale producers and against OPEC, I'll sit on the sidelines. OPEC may be ready to endure a year of pain to kill some of the marginal players in energy.

The article Oil Price Plunge Continues: Is $40 Next? originally appeared on Fool.com.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.