The price of oil has plunged into a bear market, falling for 10 consecutive sessions last week and settling more than 22% from its peak of $76.90 a barrel made just last month.
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The selloff isn’t likely to end even if a relief rally calms investors’ nerves. Forecasts for supply and demand are both going the wrong way to support higher prices.
But that doesn’t mean there isn’t money to be made.
The Bear Market Nobody Is Talking About In Oil Prices
West Texas Intermediate peaked at $76.90 per barrel and Brent crude rose to $86.74 in October, both four-hear highs, on fears that loss of Iranian supply in November would create chaos.
Those fears and bulls’ optimism were short-lived.
Increasing production in the U.S., Saudi Arabia, and Russia, as well as waivers to buy Iranian crude granted to eight countries, has meant a "sell the news" scenario with crude prices hitting the longest losing streak in 34 years.
On the supply side, U.S. output hit an all-time high of 11.6 million barrels a day in the first week of November and is forecast to reach 12.1 million bpd in 2019, according to the U.S. Energy Information Administration (EIA). The group of OPEC and non-OPEC producers led by Saudi Arabia agreed to increase production in June after cutting through 2017.
An increasing rig count may point to increasing supply over the next year with Baker Hughes reporting U.S. drillers added 12 rigs to domestic oil fields in the last week, the largest increase since May. Rigs for domestic drilling now total 886, the highest since March 2015.
While rumors have begun that the group may once again start limiting product to support prices, it could take more than a month to reach an agreement, and declining demand growth may still not be enough to prop up prices.
The International Energy Agency (IEA) recently cut its forecast for demand growth in 2019 by 110,000 barrels per day on weaker economic growth and trade concerns. China and India, which account for 60% of the global increase in demand, could both see demand growth slow from this year. The rising dollar has created a problem for emerging markets, where crude demand growth is usually highest, making imported energy more expensive.
While the IEA forecasts global demand to grow by 1.4 million bpd in 2019 versus this year, supply is expected to surge by 2.6 million bpd and exacerbate the oversupply conditions.
How To Profit From Oil’s Pain
The pain in the energy trade could benefit major users in several industries. Transportation is the most obvious with 70% of oil consumed used to move people and goods around the country. That’s more than 154 billion gallons of liquid hydrocarbons used in our cars, trucks and heavy-duty vehicles, according to the EIA.
Less well-known is the fact that petroleum products are a critical input in the plastics and chemicals industries, consuming over 191 million barrels of liquid petroleum gases (LPL) and natural gas liquids (NGL) each year.
PPG Industries (NYSE: PPG) is the world’s largest producer of coatings in the Specialty Chemicals industry. Management pointed to higher crude prices in prior quarters as a factor in lower margins but was able to push through a 2% increase in selling prices in the most recent quarter.
Industrial coatings and aerospace have both driven sales while auto refinish coatings lagged. As crude costs come down and coatings prices stay higher, profits should increase materially. The company works closely with customers to develop specialty coatings which means relatively stable sales and high customer switching costs.
Shares have rebounded 12% since the mid-October selloff in crude began but are still 12% off the 52-week high set in January. Shares trade for 18 times trailing earnings which are expected higher by 3.4% over the next four quarters but could surprise higher on stronger profitability.
American Airlines Group (Nasdaq: AAL) reported third-quarter profit plunge 48% from a year ago after fuel costs had increased by more than a third over the past 12 months. The company was able to drive a 5% increase in sales to report a company record though only 40% of the cost increase in fuel was able to be passed through to customers.
The increase in fuel costs drove the company to cost-cutting and revenue programs that could mean surging profits as the price of fuel comes back down. Management believes it can deliver up to $1 billion in new revenue from a seat upgrade program.
Shares have already rebounded 17% from mid-October but are still 38% from the 52-week high set in January. Shares trade for just 8.1 times trailing earnings which are expected higher by 13% over the next four quarters.
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Knight-Swift Transportation (NYSE: KNX) is the largest truckload carrier in the country following the 2017 merger of Knight Transportation and Swift Transportation. Shares of carrier companies surged over the two years to 2018 as investors looked to automated trucks and higher margins.
That enthusiasm for self-driving vehicles has evaporated and the shares are 33% from the 52-week high set in March, even after rebounding 13% since mid-October. While we may still be several years from fully autonomous vehicles, the International Transport Forum estimates that self-driving trucks could replace up to 70% of drivers by 2030.
The company’s fuel surcharge program recovers a majority of fuel costs though falling diesel prices will still add significantly to margins. Shares of Knight-Swift trade for 15.4-times trailing earnings which are expected to jump 20% over the next year.
Risks To Consider: Oil has already dropped quickly and could be ready for a rebound even if the longer trend is downward.
Action To Take: Save your portfolio from lower crude prices by positioning in companies that could benefit from the decline of black gold.