Market Wrap-up for Dec. 16 - Oil Free Falls, but Who Benefits?

Market Wrap-up for Dec. 16 – Oil Free Falls, but Who Benefits?


One of the biggest stories in 2014 has been the energy sector’s downward spiral this year. Recently, the price for a barrel of oil has been a big factor in global equity, bond, and commodity markets.

This morning, brent crude prices fell below $60/bbl, marking a roughly 50% decline from their peak in June of this year. Yesterday, WTI crude settled at $55.91/bbl – its lowest level since May of 2009 (the market bottom of the Great Recession). While there are a plethora of reasons for crude’s free fall–including surpluses, decreased global demand, and other geopolitical issues–what we are concerned with is who exactly benefits from this? And how can we as investors benefit from it?

More Money to Spend

The best way to approach this topic is to realize how heavily dependent we are on this particular fossil fuel. Crude powers our factories, fuels our cars, makes plastic – the list can go on and on. From an individual perspective, think about how much you spend on gas each week; more than likely, you’ve noticed that each time you fill up, it has cost less and less.

As a result, consumers like you and I benefit from lower fuel costs and an increase in disposable income. This uptick in income theoretically translates to a pickup in spending; therefore, falling oil prices are essentially a boon for consumers.

Which Industries Benefit?

Besides oil producers and explorers (which are hurt by falling oil prices), nearly every other company benefits from lower crude prices. Specifically, companies with energy accounting for a large portion of operational costs benefit greatly from this decline.

Some of these sectors include:

Another corner of the market that can also benefit from lower oil prices (albeit somewhat indirectly) is the retail sector. As we mentioned above, consumers have more disposable income at hand with lower fuel costs, meaning they are likely to purchase more goods and services, particularly at the retail level. Investors should note that this relationship is a shaky one at best; the theory has not always panned out in practice. Nevertheless, there is a correlation between fuel costs and consumer spending on other other goods.

As always, we encourage investors to keep fundamentals in check when establishing such tactical tilts in their portfolios. Keep in mind that crude is a volatile commodity, meaning this downtrend could rapidly change due to a number of internal and external factors.

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