Oil prices have fallen nearly 70% from $107 per barrel in July 2014 to near $33 in February 2016. The reason is well known and summed up perfectly in a recent report from the International Energy Agency—the oil market is drowning in oversupply. The magnitude of the decline has surprised market participants and sparked a host of fears about domestic and global economic growth. In a market full of negative headlines, it is important to remember that while lower oil prices are a threat to energy companies and oil-exporting countries, there are other areas of the market that may benefit.
In part 1, we review potential sector and industry beneficiaries if oil prices remain low for the foreseeable future. In part 2, we will take a closer look at the consumer, as well as the countries and regions across the globe.
HOW TO POTENTIALLY BENEFIT FROM LOW OIL
Businesses can benefit from lower oil prices in two ways: through cost savings (for companies using oil as a production input) and through consumers, as they spend more of their energy savings. Both methods can lead to potentially higher profits.
Low oil prices translate into lower fuel and energy costs for companies and more income for consumers, but not necessarily stock gains. Figure 1 shows stock returns and earnings growth from sectors that are expected to benefit from lower oil prices. A few sectors have managed gains in a difficult market environment and, perhaps more importantly, all have witnessed better financial results (as measured by earnings per share [EPS]). Some sectors have been punished, as market sentiment remains fragile due to concerns about future demand offsetting the benefit of lower energy costs. Still, if the U.S. avoids a recession and oil prices remain lower for longer, the valuations assigned to these industries may seem low in hindsight.
Figure 1. Many Industries that Benefit from Lower Oil Prices Have Been Punished by Market Sentiment