9 Companies Stocks That Could Benefit from Falling Oil Prices
The Power of OPEC and a Stronger Dollar
The major indices may be at record levels, but the big news on Wall Street is oil. The price of West Texas Intermediate (WTI) crude oil has fallen approximately 55% since the middle of June to roughly $69.00 per barrel—the lowest level since May 2010. Weak oil prices are a mixed bag for the economy, and for the stock market and investors, too, by extension. So, where should investors turn to take advantage of tumbling oil prices?
Oil prices fell sharply from mid-June to mid-November on the back of weak economic data out of the Eurozone, Japan, Russia, and China. The U.S. has also seen oil supplies surge as a result of increased output in shale. Production has been so robust that the U.S. became the world’s largest oil producer earlier this year.
Oil prices also felt pressure from an improving U.S. economy. Because global oil markets are priced in U.S. dollars, the price typically moves in the opposite direction of the dollar. Since the beginning of July, the U.S. dollar has increased 10.25% against global currencies. Over the same time frame oil prices have fallen 34%.
In mid-November, the IEA (International Energy Agency) warned that unless oil producers cut production, prices would continue to fall through the first two quarters of 2015. The agency left its 2014 demand growth forecast at 700,000 barrels, or 92.4 million barrels a day. That’s below-average demand growth for 2012 and 2013.(1)
Oil prices took another major hit in late November after OPEC (Organization of the Petroleum Exporting Countries) rejected calls for a cut to production. Not so secretly, OPEC needs to keep its output steady to keep global oil prices low. Low prices will put pressure on non-OPEC oil-producing regions, especially shale oil reserves that need higher prices to be profitable.
OPEC members will meet again on June 5, 2015 to debate output.
Even Russia—a country that gets half of its budget from oil and natural gas, needs $100.00 oil to balance its budget, and is teetering on a recession—agreed to follow OPEC’s lead and not cut output. Russia says it will keep its production stable next year at more than 10 million barrels per day.(2)
The World Is Awash in Cheap Oil
This presents investors with many interesting opportunities. And the longer oil prices stay low (until summer 2015 at least), the greater the impact it will have on stocks.
For starters, weak oil prices are not good news for energy companies, industrial firms, or businesses that produce and process raw materials. That excludes a large number of companies on the S&P 500.
There are a lot of companies that will benefit from low oil prices; specifically, businesses that will save money on declining energy costs, such as transportation companies, like airlines and trucking.
Will These Stocks Benefit From Ultra-Low Oil Prices?
While airline stocks have been doing well over the last two years, current oil prices show there is still plenty of room for growth. Three airline stocks to keep an eye on are discount carrier JetBlue Airways Corporation (NASDAQ/JBLU); Southwest Airlines Co. (NYSE/LUV), which has a strong domestic presence; and United Continental Holdings, Inc. (NYSE/UAL), which was formed from the merger of Continental Airlines and United Airlines and has a strong international footprint.
If you’re interested in trucking companies, Old Dominion Freight Line Inc. (NASDAQ/ODFL) has been performing well since the beginning of 2010 and remains bullish. Another brand that might benefit from low oil prices is The Goodyear Tire & Rubber Company (NASDAQ/GT). After all, lower gas prices should translate into more driving and additional wear and tear on tires.
You could also look into stocks that service America’s highways, too. TravelCenters of America LLC (NYSE/TA) owns a network of more than 235 interstate highway travel centers in 41 U.S. states and Ontario, Canada.
Sustained lower oil and gas prices will be a boon for the economy. The less people spend on filling up their cars the more disposable income they have. This is a plus for any economy, especially in the U.S., where 70% of our gross domestic product (GDP) comes from consumer spending.
As a result, investors should also look for companies that cater to consumers who find they have more money to spend thanks to low gas prices. This includes retailers like Costco Wholesale Corporation (NASDAQ/COST), Dollar Tree, Inc. (NASDAQ/DLTR), Wal-Mart Stores Inc. (NYSE/WMT), and Tuesday Morning Corporation (NASDAQ/TUES).
Low oil prices coupled with an improving economy and ultra-low interest rates could reshape the domestic and global economies. Many investors are angry that they missed getting in on the bull market that began in March 2009. But this could be another starting point.