Oil prices as measured by European benchmark Brent crude hit $80 per barrel this week for the first time since 2014. Let's look at what's going on - and some stocks that stand to win (and lose) as a result.
Now, if you listen to oil traders, you'll hear many discuss how it's the "marginal" barrel of oil affects prices. This incremental supply drives oil-futures prices on any given day. More supply means lower prices, while less supply sends prices higher.
However, U.S. weekly oil production actually rose to 10.7 million barrels of petroleum per day last week, yet totaled just 9.3 million barrels per day in November 2014. In fact, total U.S. oil inventories are now merely "in the lower half of the average range for this time of year," according to the U.S. Energy Information Agency.
By contrast, global inventories fell to 62.819 billion barrels as of March, according to the latest International Energy Agency figures. That's the lowest level in three years, and puts global inventories below their five-year average level.
Now, it'd be easy to trace oil's bust and subsequent rebound by looking at implementation of the 2015 Iran nuclear deal, which lifted sanctions on Iranian crude in exchange for Tehran agreeing to suspend alleged nuclear-weapons development. President Donald Trump recently decided to pull out of that deal, which should cut Iranian oil exports.
But please don't make the mistake of thinking oil's price rise is that simple to understand. After all, the market hasn't actually lost Iranian production yet.
In addition to the Iran issue, plunging oil output in chaotic Venezuela has pressured near-term supply. And at the same time, global oil demand shows no signs of abating.
Add it all up and the propeller-heads who focus on every incremental drop of new oil that's coming out of the U.S. Permian Basin are missing the point. The fact is, it's going to be a long, hot summer at the gas pumps.
How should investors play all of this? Well, I've previously recommended my beloved smaller exploration-and-production names -- Gastar Exploration (GST) , Sanchez Energy (SN) , Evolution Petroleum (EPM) and Denbury Resources (DNR) .
But let's also look at some likely losers from higher oil prices. Here's rundown of some sectors and individual stocks that look less attractive to me at a time of elevated energy costs:
- Airlines. Higher jet-fuel prices are going to pressure airfares right in the heart of the summer travel season. That's unfortunate timing, particularly for companies with relatively higher exposure to leisure travelers, like Spirit Airlines (SAVE) and Allegiant Travel (ALGT) .
- Autos. Higher fuel prices would reduce the affordability of auto travel at a time when higher U.S. interest rates already threaten to increase car-financing costs. Meanwhile, higher prices for plastics (which are derived from oil) will pressure automakers' margins. Ford (F) and General Motors (GM) are the obvious losers here.
- Logistics Companies. It's unclear to me how much of higher fuel costs FedEx (FDX) and United Parcel Service (UPS) can pass through to shippers in the age of Amazon. Instead, I think both companies will have to accept lower margins in the short term.
The Bottom Line
My advice: Check your portfolio and purge it of those stocks that higher oil prices will likely negatively impact. That will make your summer vacation much more pleasant and stress-free!
