It’s
been a great Thanksgiving for everyone, with more and more people feeling
better about the economy and with the stock market moving along, for all those
who have a car things have become even better with gas prices falling to levels
not seen since 2009. There is also more good news for driver’s gas prices are
likely to fall even lower. On the surface this seems like great news, in
reality however the fall in oil prices could actually be harmful for the United
States economy.
There
are many factors that have contributed to the fall of oil from over $100 a
barrel to under $70, chief amongst which is the sheer amount being produced. At
this moment in time OPEC (the organization of oil exporting countries) produces
about 30 million barrels of oil a day, both Russia and the U.S each produce
another 10 million barrels each, add in production from Nigeria, Canada, and
Venezuela you get more oil than the world needs.
Oversupply
is one reason why oil prices have tumbled so far this year but Friday, November
28, 2014, while consumers were enjoying black Friday, oil prices fell over 10%
to settle at 4 year lows. This dramatic drop in the price of oil sent the
energy sector into a tailspin. Solid blue chips like Exxon and Chevron saw
their shares fall 4% and 5% respectfully. Other oil companies and energy
companies did not get off that lightly, shares of oil service companies which
include Baker Hughes and Halliburton fell nearly 9% and 10%. Shares in off
shore drillers also got slammed with Transocean and Ensco both seeing drops of
over 9%. Along with oil, shares in renewable energy companies like First Solar
also tumbled as investors see low oil prices threatening solar and other
renewable energy industries.
The
catalyst for Friday’s massive energy sell off was OPEC’s surprising decision
not to cut oil production, as they have done in the past when oil prices fell
off. It seems that OPEC is shooting itself in the foot, since low oil prices
would seem to hurt the economies of OPEC members such as Saudi Arabia, Kuwait,
Iraq and the United Arab Emirates. The truth is quite the opposite, OPEC’s
decision not to cut oil prices is a shrewd way to destroy competitors
exploiting shale oil in the U.S and oil in Russia.
Basically
OPEC is betting on the fact that it withstand lower oil prices longer than any
other competing nation in the world. This does seem to be true, Saudi Arabia,
Kuwait and the U.A.E (United Arab Emirates) have a combined savings of over
$2.5 trillion. Giving them some cushion against falling oil prices, meanwhile
compare that to Russia who is losing over $140 billion to sanctions and the
same falling prices and the U.S whose oil production depends on shale oil,
which is becoming less commercially viable by the second as prices decline.
OPEC is willing to sacrifice short term profit if it means destroying its
competitors in U.S shale and Russia. So with oil prices set to go even lower
which industries stand to profit and which ones are the most exposed.
One
industry that is the most exposed to falling prices is offshore oil. This
industry includes companies such as Baker Hughes, Halliburton, Ensco,
Transocean, and Diamond Offshore, these companies and their subsidiaries derive
most of their income through building and leasing offshore oilrigs. The industry
historically is undervalued and while oil prices are high offshore oil is an
attractive investment, the main problem is that offshore oil is expensive and
setting up drills costs oil companies a fortune. As prices sit, offshore
drilling is not commercially viable and many companies have already have begun
to scrap several expensive offshore projects in the face of falling oil prices.
Offshore drilling companies have seen their stocks collapse this year and many
sit at 52 week lows.
On
the other end of the spectrum are the airlines that have enjoyed a nice rally
as prices of jet fuel fall alongside oil. Airline stocks have seen a resurgence
in the last 2 years, as consolidation has allowed airlines to raise airfare and
fees, all of which has added to their bottom lines. Southwest Airlines is the
top performing stock in the S&P 500 this year, with shares nearly doubling.
Other airlines like Delta and American have also enjoyed solid 50-60% gains,
and with oil prices continuing their free fall airline stocks are set to go
even higher, especially since airline stocks still trade at evaluations that
are a bargain when compared to the broader market.
Airlines
are not the only industry that is benefitting from lower oil prices; retailers
are also getting a lift as more people spend their savings from lower gas on
gifts for the holidays. With that being said, with the exception of retail and
to a greater extent to airlines if oil prices continue to plunge the economy
and the stock market might get rocky. The logic behind this is that with the
shale oil boom in the U.S many states and local economies have become more and
more dependent on the energy industry to survive. U.S oil companies have
already begun to slash costs and projects in certain areas, mostly in the Gulf,
but if prices continue to fall those cuts might and will spread to the shale
oil deposits and drilling operations in the Continental U.S. This will hit the
economies of the northern mid-western states hard, states like North Dakota
might be facing financial problems in that scenario.
If falling oil
prices destabilize the energy sector then this will spread to other industries and
might send the U.S into a bear market. With that being said the economy as a
whole is improving so any future economic crisis is not likely, but this does
not mean that the stock market will not receive a larger hit as energy drags it
down. Personally I feel that these falling oil prices are an opportunity to buy
into industries like Airlines and retail, which will only go up as oil goes
down.
IN THE NEXT FEW
MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY
STOCK TIPS AND POTENTIAL OPPORTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES
ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
IF YOU HAVE IDEAS FOR
THE NEW WEBSITE PLEASE COMMENT
ALSO COMMENT ABOUT
WHAT YOU THINK OF THE BLOG AND ANY IMPROVEMENTS YOU WOULD LIKE TO SEE
IF YOU HAVE FRIENDS INTERESTED IN THE MARKET PLEASE LET THEM KNOW ABOUT THE BLOG SINCE I AM
CURRENTLY ADVERTISING SOLELY THROUGH WORD OF MOUTH
THANK YOU
