Daily Gains Letter

Top Three Sectors to Profit from Weak Oil Prices

By for Daily Gains Letter |

Oil PricesOil prices are on the downside, and we could see West Texas Intermediate (WTI) oil decline to the $40.00 level and below.

A few years ago, the mere mention of oil in the $30.00 level would have been viewed as silly, as many believed $100.00-a-barrel oil prices would be the norm.

But here’s the problem: the advanced fracking technique to squeeze out oil from the cracks in the rock led to a revolution in oil production, which inevitably is hurting oil prices. The good news: it’s creating an investment opportunity for aggressive investors.

Pressures Pushing Oil Prices Downward

Now, we have massive domestic oil production from the shale oil in Montana and North Dakota that has helped to produce a flood of oil inventory. So much so that the ability to store the excessive oil will likely not be possible, which means continued cuts in rigs and production.

So far, more than 800 rigs have been shut down. Based on the growing stockpiles, I fully expect hundreds of additional rigs to be axed. We could see thousands if oil prices stay at the $40.00 level.

The Organization of Petroleum Exporting Countries (OPEC) is continuing to maintain its production quota, trying to force U.S. oil producers to continue to cut rigs. This strategy appears to be working, but not at the faster rate the oil cartel wants to see.

At this juncture, we could see oil prices at the $30.00 range or even lower if the supply/demand imbalance continues and the global economy also continues to stall.

Investment Opportunities to Profit from Weak Oil Prices

A move of oil prices down to the $30.00 range could provide an aggressive investment opportunity to accumulate some of the major oil stocks and hold them for the long-term, hoping oil prices rally back towards the $70.00–$80.00 levels (albeit, this could take years).

Light crude oil spot price

Chart courtesy of www.StockCharts.com

To play the weaker oil prices, you can also play the sectors that benefit from weaker oil prices, such as the transportation sector or stocks on the Dow Jones Transportation Average (DJTA). Stocks that serve as good examples of the kinds of companies to watch include J.B. Hunt Transport Services, Inc. (NASDAQ/JBHT), Landstar System, Inc. (NASDAQ/LSTR), United Parcel Service, Inc. (NYSE/UPS), and FedEx Corporation (NYSE/FDX).

Dow jones transportation index

Chart courtesy of www.StockCharts.com

Sectors that are rallying on the lower oil prices include the airlines, airline makers and suppliers, trucking companies, and parcel delivery companies.

Airlines, in particular, are benefiting from the lower fuel prices, especially those with unhedged fuel prices, such as American Airlines Group Inc. (NASDAQ/AAL). Of course, the discount airlines listed on the DJTA, like JetBlue Airways Corporation (NASDAQ/JBLU) and Southwest Airlines Co. (NYSE/LUV), are also worth a look.

My sense is that unless the demand side surges or the supply side plummets, the lower oil prices are here to stay for a few years—good news for the transportation, travel, and delivery sectors.

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