Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Low Oil Prices Benefit at the Pump and in the Market

Commodities / Credit Crisis 2015 Jan 12, 2015 - 12:49 PM GMT

By: Money_Morning


Peter Krauth writes: Low oil prices is certainly one of the biggest stories of the past six months.

Indeed, as the price of crude continues to drop, currently hovering just under a once-unthinkable $50 per barrel price, the issue is sure to be in the news well into the foreseeable future.

But the issue goes beyond simply lower prices, and it spawns some even bigger questions:

Are supply and demand really the drivers at work? Is it political warfare above all? How will global markets react when prices rebound?

One way or another, the implications of much lower oil prices are huge, and will impact markets, industries, and sectors across the board throughout the coming year.

All of which leaves investors wondering what to do next, and how to play this changing-by-the-day industry.

There's no time like the present to take a look at the potential pitfalls, and the emerging opportunities, that this disruption brings… and to let you know about a medium-risk way to play it for near-term profits.

The Benefits of Cheaper Oil

Light sweet crude oil prices recently dropped below $50. The last time oil was this cheap happened in the spring of 2009, after the stock market panic of late 2008.

Without a doubt, a surge in supply from North American shale production has boosted supply.  On the flip side, global demand has weakened thanks to a feeble world economy, and the continued progress in global energy efficiency.

The Saudis are selling their oil at a fixed spread (discount) from benchmarks for a number of reasons. Most obvious is to maintain market share, but such low prices also hurt the highest cost producers, like the shale plays. The Saudis are forcing a lot of that supply to come offline, allowing them to step in and fill the void.

It's no doubt by design, too, that low prices hurt other high cost producers, like Iran – a long-time Saudi nemesis, and Russia – particularly out of favor with the West right now.

Politics are a big motivating factor, and as we examined in November, it was a successful strategy in the past.

In the near term, what this means for us consumers is cheaper gasoline, which has hardly gone unnoticed. But it also means cheaper fuel of other types, like natural gas and oil for home heating, as well as jet fuel for airplanes.

The biggest beneficiaries may end up being those in lower income brackets. RBC Capital Markets estimates the average American household will save some $42/month on gas this year should prices stay at these levels.

Deutsche Bank chief U.S. economist Joe LaVorgna thinks restaurants and retailers will benefit most, as these consumers decide to spend the windfall rather than save it.

The Downside That Comes Along

We can't, however, ignore the downside of lower oil. And it has clearly started to manifest itself.

The highest cost production is the first tranche to get severely curtailed. Shale oil patch former darling Oasis Petroleum Inc.'s (NYSE: OAS) recent guidance for 2015 is an alarming sign.

OAS is down over 70% in the last 6 months. The company will spend $750 million to $850 million this year on drilling wells and production setups. That's half of 2014's $1.43 billion spend, and management forecasts production to rise just 5% to 10% this year, after clocking 50% in its recent past.

Oasis won't be alone either.

Projects will get mothballed or even outright cancelled. Already, Excelerate Energy's Texan LNG gas terminal, an 8 million tonne per year export plant, has been officially suspended.

Let's also not forget that, although on a localized basis, thousands of high-paying oil patch jobs will simply evaporate. It also means a lot of future investments will, at best, face meaningful delays. That's money not making its way into the economy, balancing out the positives of lower fuel costs.

Another consequence is lower tax revenues into government coffers, which could lead to bigger deficits.

Also, turning the oil taps back on after curtailing production is not easy, cheap, or fast. People have to be rehired, and in some cases permits obtained. Supply may simply not be able to respond that quickly to a return in demand.

And there is at least one more piece to this global puzzle…

This Factor Will Remain Uncertain

Remember the Arab spring that began in Tunisia and worked its way through much of Northern Africa and the Middle East?

Amongst the countries affected were significant oil producers like Saudi Arabia, Algeria, Iraq, Libya, and Kuwait.

Many of these, plus Venezuela, Nigeria, and Russia rely heavily on oil revenues to subsidize their social programs and in some cases even the prices of staple consumer products.

In most of these cases, the oil industry is either completely or heavily nationalized. So profits go straight to government coffers. These countries have few choices: spend from reserves (if any) to maintain subsidies, borrow further on international markets, or reduce subsidies (not particularly popular with the populace).

But in some instances, like Venezuela, it's already led to repeated unrest. Russia's hurting pretty badly, and could be next to experience internal strife.

An unintended consequence of such conflicts puts still more oil production at risk, making future ramp-ups in output even more uncertain.

Even if only some of this comes to bear, we could well be looking at a violent rise in oil prices as early as the second half of this year.

All in all, the picture is, at best, muddled and uncertain. But we can certainly set ourselves up for profit in spite of the difficulties…

Your Profit Opportunity Is Ready

In the near to medium term, oil prices are likely to stay low and move sideways, or perhaps move even lower first.

One thing the shale boom has meant is abundant and cheap natural gas. Low oil is likely to keep it that way for a while yet. So the industrial renaissance in North America of the last few years should carry on with hardly a dent.

E.I. du Pont de Nemours and Company (aka DuPont) (NYSE: DD) is a global conglomerate that's active in agriculture and nutrition, bio-based industrials, and advanced materials.

More specifically, this means innovative products in things like agricultural chemicals, biofuels, biomaterials, advanced polymers, and protective and electronic materials.

The company has been a major innovator, and that's added more than $10 billion of revenue in 2013 from products that were introduced in the past four years alone.

Many of these products require oil and natural gas as inputs, either as energy for processing or as raw materials, which is why I especially like the company's prospects in the near and mid-term. With sustained low oil and natural gas prices over the last couple of quarters and likely for several more, profits should handsomely beat expectations.

Although shares are up 60% in the last two years, they've also been robust over the last couple of quarters, outpacing the S&P 500 by 10%. Earnings jumped 52% in Q3 on lower expenses. With a forward P/E of 16.5, current yield at 2.7%, and return on equity of 20.9%, this is a solid play on lower energy prices.

Stay mindful that that a strong and sustained rise in oil and natural gas prices could become a headwind, so use a trailing stop on this idea.

As we work through the current oversupply in oil and natural gas, remember that markets work over time and prices will rise again. People and industry will adjust, and consumers will increase consumption to take advantage.

My advice is to enjoy cheap fuel costs while they last.

Source :

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules