Who Really Benefits From Falling Oil Prices?
On Tuesday the price of oil fell to its lowest level in several months at below $95 per barrel. The fact that we are seeing so much production in the United States — thanks to hydraulic fracturing – means that supply is increasing, while it is not being absorbed by demand.
With this in mind, investors should look to position themselves accordingly. But virtually every business and consumer — except, of course, for oil producers – benefit from falling oil prices. So the simple approach would simply be to buy the entire stock market through an index fund. But things aren’t so simple. First, the fact that we aren’t seeing an increase in demand could be indicative of economic weakness.
This wouldn’t be the first sign. Despite the fact that the second-quarter GDP figures were strong, the economic data have largely been mixed over the past few months. Second, there are going to be companies that benefit far more than others in a lower oil price environment, and if you think that oil prices are going to remain “low” — I use the term loosely, because $94 per barrel is historically not low – these are the companies that can see the biggest gains as their profit margins expand.
While there are many companies in this situation, I have identified two sectors that are going to benefit more than the broader stock market.