How can you profit from the collapse in oil prices?
I’ve had a number of people ask me in recent days whether it’s a good idea to buy oil stocks for the long-term now that prices have crashed. After all, they reason, we will still be using oil when the coronavirus lock-downs end.
There are undoubtedly oil companies that will survive the current collapse in oil prices, which bizarrely went below $0 on the benchmark front-month US WTI futures contract this week. But is now really the time to be trying to pick a bottom and buy shares in oil companies for the long-term?
Maybe. But I’m not sure things don’t get even worse from here. Never has such a large demand destruction occurred. In Spain for example, for the week ended April 19, aviation fuel demand was down 93%, petroleum demand was down 81%, and diesel consumption slipped 55%.
We’re literally in unchartered territory. And while the demand destruction is instant, the supply response as well are shut in, takes effect with a long time lag.
So, rather than try and bottom fish in the likes of Exxon Mobil (XOM on the NYSE) and Royal Dutch Shell (RDSA on the London Stock Exchange) I think a better approach might be to try and work out who’s going to benefit from lower oil prices.
Ordinarily, top of the list would be companies such as airlines, cruise-liners, and other transportation stocks. But this time, those companies are in even worse shape than oil producers, due to the global coronavirus lockdown that stopped their business cold in its tracks.
However, while people are not traveling or moving around, cargo still is. Everyone is sitting at home shopping online and having goods delivered. (You can see that in the relatively lower drop in diesel demand in the Spanish figures above.)
So, to me, the likes of Royal Mail in the UK, and UPS in the USA should see some benefit. Demand for their services continues as they drive around delivering parcels. But their fuel costs, second only to their wages costs, are bound to have come down dramatically due to the collapse in oil prices. That will improve their profit margins and should see them deliver higher returns to shareholders.
Beyond that, one of the industries that surprisingly benefits the most from low oil and diesel prices is the mining sector. Fuel costs to run mining and drilling equipment are a huge input cost. And right now my favourite exposure in the mining sector is the precious metals.
I’ve written elsewhere about some of the cheapest global gold stocks right now.
They could be another good way to cash in on low oil prices that you would not immediately have thought of.