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December 3, 2014

Who Wins in The Oil Price Survivor Game?

By Chad Fraser, Investing Daily 
Call it the Thanksgiving Oil Massacre.

While most Americans were wolfing down turkey, catching up with family or chasing Black Friday deals, crude was facing the biggest beat-down it’s seen in years.
The catalyst: OPEC’s Thanksgiving Day decision to keep the taps open, holding the bloc’s output at 30 million barrels a day despite weaker demand and a surge of new oil from the U.S. shale boom.

When the dust settled on November 28, a barrel of West Texas Intermediate had plunged more than 10%, closing at $66.15. It’s now down more than 35% since late June.

Shale Producers Feel the PinchOPEC’s move ups the pressure on U.S. shale drillers, who also seem happy to keep the pedal down, at least for now, according to Robert Rapier, chief strategist at our Energy Strategist service.

“[Shale] companies are on a shorter leash than the state-owned OPEC producers, but their hedges, falling production costs and considerable debt have so far encouraged them to keep on drilling while reviewing their capital spending plans,” he wrote in a November 28 article in response to the plunge.

“These are now highly likely to be curtailed. But in the meantime, an oversupplied market that saw no change in supply/demand dynamics after a 20% discount is seeing if 35% might do the trick.”

Rapier thinks oil and oil stocks are near a bottom. However, he warns that markets could still overshoot further to the downside and recommends that investors make sure they’re properly diversified beyond the sector.

Drillers’ Pain Is Consumers’ GainBeyond the energy sector, pretty well everyone is a winner.

According to figures from gasbuddy.com, regular gasoline is averaging around $2.75 a gallon around the nation, down about 25% since late June. In some parts of the country, it’s below $2.50.

Here’s what that works out to, according to a bevy of estimates out Monday:
  • A $75-billion “tax cut”: According to Goldman Sachs (NYSE: GS) analyst Kris Dawsey, that’s what the plunge at the pump has amounted to for consumers;
  • $1,100 per household: Over at MarketWatch, reporter Jeffry Bartash ran some numbers and found that this is how much a typical family will save if gas prices average $2.50 a gallon next year.
  • A 0.3% GDP boost: That’s how much of an annual lift the U.S. economy could see if lower oil prices persist. In the third quarter, the economy grew at an annualized rate of 3.9%.
So where should investors be looking as the oil drama plays out?

Obviously, you shouldn’t base investment decisions solely on oil prices, which could easily snap back at the drop of a hat, but here’s a closer look at two sectors our Investing Daily experts are watching now, as well as some stocks that stand to gain from a prolonged price slump.

Automakers: Back to 1994?The global auto business was already on cruise control before the oil rout started.

On November 27, while OPEC was announcing its decision, economists at Bank of Nova Scotia (NYSE: BNS, TSX: BNS) were releasing their monthly auto sales report, which showed that volumes zoomed ahead 3% in October, to new record highs, mainly supported by growth in China, the U.S. and Western Europe.

Falling gas prices are an obvious plus for vehicle sales, and this latest plunge could set up a situation like we last saw in 1994, when auto sales jumped 9%, according to the bank.

“We believe the current environment is most similar to 1994, with the North American economy beginning to build momentum and providing a boost to global activity,” reads the report. “In both periods, interest rates had remained low for an extended period and labor markets—the key economic driver of new vehicle sales—were finally recovering following a long period of sub-par performance.”

To top it off, despite the volatility of fuel prices, some drivers still can’t resist the lure of SUVs, crossovers, big pickups—and yes, even Hummers—in times like these.

That’s good news for automakers, because these vehicles are more profitable than cars. It’s a particular benefit to Ford (NYSE: F), General Motors (NYSE: GM) and Chrysler, which dominate the U.S. pickup market with a combined 90% share.

Rising auto sales are also welcome news for component makers like Canada’s Magna International (NYSE: MGA, TSX: MG), which counts Ford, GM and Chrysler among its customers. The company’s sales and profits have gained along with global auto production.

Gas Station Operators: Fill ’Er Up!Meanwhile over at our MLP Profits advisory, chief strategist Igor Greenwald has been on the hunt for a direct way for readers to profit from the plunge at the pump, and he thinks he’s found it right at the source: gas stations.

“When pump prices are high and rising, filling stations inevitably get squeezed by suppliers jacking up their costs, while motorists fume, hunt for the cheapest gas in town and skip that soda from the station’s convenience store,” he explains in a November 17 article.

“But when prices are falling, an entirely different dynamic takes hold. Pump prices decline slower than wholesale gasoline, because drivers stop being so picky. They might drive more, and definitely spend more on sundries at the mart. More sales at fatter margins would make any business owner happy.”

The drop comes as travelers gear up for the busy holiday season. According to the U.S. Department of Transportation, Americans take 54% more long-distance trips than average over Thanksgiving and 23% more between Christmas and New Year’s. About 91% of these journeys are by car.

Three Fuel Retailers to WatchThere aren’t many pure-play fuel retailers open to investors, as integrated oil majors and refiners own many. One is CST Brands Inc. (NYSE: CST), a chain of filling stations and associated stores recently spun off by refiner Valero Energy Corp. (NYSE: VLO). The company has 1,900 locations in the U.S.

Another is Canada’s Alimentation Couche-Tard (TSX: ATD.B), the corporate parent of the Circle K chain. Couche-Tard operates 4,445 stores in the U.S., 1,900 in Canada and 2,250 across Scandinavia, Poland and Russia.

Another player is Global Partners LP (NYSE: GLP), a Northeast fuel dealer with a growing presence in the gas station market.

Following a series of acquisitions in recent years, the master limited partnership now supplies a billion gallons of gasoline annually to more than 1,000 gas stations, including 126 it owns and operates and 415 leased out or managed on commission.

In the first quarter of 2015, Global expects to close its acquisition of a filling station and convenience store chain from Warren Equities. At that point, the MLP would be supplying gas to more than 1,500 stations and would own roughly half that total.
Courtesy Investing Daily (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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