The Winners and Losers of Dropping Oil Prices

Oil PricesCheap Oil Isn’t Hurting Everyone

Dropping oil prices have been a boon for cash-strapped, debt-laden Americans, but for how long the oil glut will continue is anyone’s guess. With the price war raging on, many businesses are scrambling to cut their losses and protect their bottom lines. But cheap oil isn’t hurting everyone.

Between June 2014 and the end of October, oil prices fell around 23%, from $105.00 per barrel to $80.00 per barrel, on the heels of increased supply of North American shale oil and a weakening global economy.

Oil prices were kicked off the cliff in late November after OPEC (Organization of the Petroleum Exporting Countries) announced it would not reduce its output. Over the ensuing months, oil prices fell to around $45.00 per barrel. Currently trading near $50.00 per barrel, oil prices have fallen more than 50% since June.

How long will oil prices stay low? It depends on whom you ask. Some predict oil could hover around $60.00 per barrel for the next five years. Saudi Prince al-Waleed said oil prices could rebound, but he was sure we’d never see oil at $100.00 again.(1) The OPEC secretary general Abdulla al-Badri, on the other hand, said recently that oil prices had bottomed and could shoot back to $200.00 per barrel.(2)

Even amongst its own member countries, OPEC seems to have trouble coming to a consensus. What they do agree on, however, is that OPEC’s decision to not cut oil production in the face of a global slowdown had nothing to do with undermining fracking efforts in the U.S.

As Abdulla el-Badri stated, it was a “pure economic decision to benefit our member countries.”(3) Someone forgot to tell OPEC members Iran and Venezuela about the benefits.

The Losers of Cheap Oil

Regardless, with the International Monetary Fund cutting global growth forecasts, it’s fair to say demand for oil will remain muted. As a result, small oil and gas companies will continue to hurt. Some will cap their wells, while others will be takeover targets.

That’s bad news for the Toronto Stock Exchange. The leader in the oil and gas sector, there are more oil and gas companies listed on the Toronto Stock Exchange than any other exchange in the world.

Certain nations that rely heavily on crude oil will also face hardship. Like Russia for instance, the world’s third-biggest producer. Russia relies on oil and gas for around two-thirds of its exports and gets about half of its budget revenue from oil and natural gas taxes.

To avoid a recession, Russia needs Urals, its primary export crude blend, to trade at $100.00 per barrel. Thanks to international sanctions, low oil prices, and inflation, Russia will tumble into the red this year. Major oil-producing nations, such as Iraq, Syria, Nigeria, and Libya, are also experiencing economic turmoil.

And the Winners of Cheap Oil Are…

Who are the winners? A lot of U.S. stocks it seems. The S&P 500 only has about 40 oil companies on it. Indirectly, however, weak oil prices are not good news for energy companies, industrial firms, or those that produce raw materials.

Who will benefit? Companies that save money from declining energy costs, such as transportation companies like airlines and trucking/logistics firms. Airline stocks that have been doing well since oil prices tanked are discount carrier JetBlue Airways Corporation (NASDAQ/JBLU), Southwest Airlines Co. (NYSE/LUV), and United Continental Holdings, Inc. (NYSE/UAL).

Speaking of trucking firms, a company like TravelCenters of America LLC (NYSE/TA), which owns a network of more than 235 interstate highway travel centers in 41 U.S. states and Ontario, Canada, should benefit from lower oil and gas prices. That’s because more and more people will travel, stop for a fill-up, and pop in for food or a bathroom and coffee break.

More people on the roads will also translate into additional vehicular wear and tear. That could benefit a company like The Goodyear Tire & Rubber Company (NASDAQ/GT) and auto parts makers.

Lower oil and gas prices also translate into additional disposable income. This could benefit defensive plays like Johnson & Johnson (NYSE/JNJ), Unilever N.V. (NYSE/UN), and ConAgra Foods, Inc. (NYSE/CAG).

Admittedly, it doesn’t mean we’ll have an extra $25,000 to play with each year, but it could help alleviate some financial stress. Investors might also want to consider retailers like Costco Wholesale Corporation (NASDAQ/COST), Dollar Tree, Inc. (NASDAQ/DLTR), and Wal-Mart Stores Inc. (NYSE/WMT).

Low oil prices might be indicative of a weakening global economy, but they do give individuals more discretionary income and lower the costs for many businesses. This has opened a window of opportunity for investors.