For most Americans, this year’s sudden collapse of oil
prices appears to be unqualified good news. Oil prices have dropped 45% since
June, amid surging output from U.S. shale fields, strong Saudi Arabian
production and weak demand from Asia and elsewhere. They dropped 12.2% just
last week, closing Friday at $57.81 a barrel. Analysts at Credit Suisse and
other banks say it will take years before oil prices return to $100-a-barrel
levels.
For drivers and those who rely on oil to heat their homes,
falling crude prices act as an unexpected bonus or tax refund. But for
investors, it gets a bit more complicated. Sure, energy stocks are taking it on
the chin, as are companies that seem far removed from the oil patch—among them
debt-laden North Dakota oil drillers, energy-service companies and junk bonds.
A Boost for Retailers
But there are also potential winners, such as retail stocks.
Last week, the Commerce Department reported that retail sales grew 0.7% in
November, the sharpest rise in eight months. With gas prices below $2.50 a
gallon in many parts of the country and oil continuing to weaken, that growth
could continue. An improving employment outlook also helps.
Not all retail sectors are benefiting. While automobiles and
parts sales are strong, as are clothing and accessories, food and beverage,
along with sporting goods, don’t seem to be getting much of an uptick.
Some analysts say the best bets are lower-end retailers like Wal-Mart
Stores, Costco Wholesale and Big Lots. Falling gas prices provide big
benefits to customers of these stores, analyst say, because they give low-wage
earners more to spend on household goods and other items. Last month, Wal-Mart
reported its first quarterly sales increase since 2012, citing falling gasoline
prices as a factor. Big Lots, under new management since last year, also could
benefit.
Falling fuel prices could hurt Costco, one of the country’s
largest fuel retailers. But analysts predict higher earnings for the company,
partly because cheaper driving makes it more appealing to make longer shopping
trips to warehouse stores such as Costco and Wal-Mart.
Airline profits will also rise, analysts say. Fuel
represents about half of airline costs, and few are expected to pass the
savings to customers through lower fares. American Airlines shares are up
25% in the past six months, less than Delta Air Lines’s 35% jump, and some
say American is a more reasonable value.
But a growing number of analysts warn investors to beware of
the downside to falling oil prices. The energy industry, of course, will remain
under pressure as long as prices drop. Some are adjusting their businesses.
Last week, British oil giant BP said it would cut jobs and take $1 billion in
restructuring charges, and others are trimmings spending plans.
Banks exposed to energy include Oklahoma lender BOK
Financial Corp. (BOKF), which has extended 19% of its loans, by value, to
energy-related companies, according to BMO Capital Markets.
Already, the junk-bond market is being crippled because 14%
of those bonds are energy-related. Energy companies often hedge at least some
of their oil production at higher prices and don’t face repayment of the
principal on their junk bonds for several years, suggesting there won’t be an
immediate wave of bankruptcies.
Oh Canada
The Canadian economy could get hurt if oil remains weak,
because of the country’s important energy industry. That’s why newsletter
writer Jared Dillian predicts weakness for Canadian Imperial Bank of
Commerce (CIBC) and Toronto-Dominion Bank (TD).
Still, energy prices are just one factor in an investment
outlook and shouldn’t be the sole reason to adjust a portfolio. Falling prices
can help consumers, for example, but if the housing market’s recent weakness
continues it could offset some of the benefits.
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