Which Stocks Will Benefit from Lower Oil Prices?

Energy bulls aren’t enjoying the oil market at this time! Oil prices fell below $51 a barrel on January 16 for the first time since May 2005. The selling continued a downward trend that started after the recent rally above $60 failed to hold and was followed by a strong break below technical support at $55 a barrel.

News that Organization of Petroleum Exporting Countries (OPEC) member Saudi Arabia doesn’t want any additional production cuts, despite the lower prices, drove the most recent bout of selling. Prior to this, the unseasonably warm winter weather reduced the demand for oil. The basis February light sweet crude on the NYMEX fell below $51 to $50.53 a barrel on January 16.

The near-term outlook for the basis February light sweet crude oil is bearish. The chart of the basis February light sweet shows a strong downward trend after failing to hold at $55 to $60. With the selloff, the February oil is below its 20-day moving average at $58.88, as well as the 50-day moving average at $60.99. The Relative Strength Index (RSI) is extremely weak and suggests more weakness. We need to see the RSI strengthen further in order to drive a sustainable rebound.

If oil breaks below $50, we could see a move towards $48.74 and the 14-day 20% RSI at $48.49.

As an investor, with the lower oil prices, we could see some strength in transportation stocks and airlines. For the stock market, retailers could benefit since more disposable income is available due to cheaper gasoline expenses. Big box retailers in suburbs such as Wal-Mart Stores Inc. (NYSE/WMT) could gain from lower gasoline prices as consumers drive their cars to malls.

At this point, you may want to stay on the sidelines and wait for some support to surface before perhaps jumping in and playing a potential rebound.