Daily Gains Letter

Weak Oil Prices a Boon to Airline Stocks

By for Daily Gains Letter |

Weak Oil Prices a Boon to Airline StocksOil prices are heading lower, folks. The benchmark West Texas Intermediate (WTI) broke down to the $75.00 level last Thursday, as shown on the chart below, and could be threatening to take a run towards $70.00. Even the thicker Brent Crude oil prices (shown by the dark green line in the below chart) are not that much higher. And that’s worrisome if you are an oil producer.

The reality is that the supply-demand equation is currently out of whack, with muted demand and excess supply, which in the most basic terms, translates into lower oil prices.

Light Crude Oil - Spot Price Chart

Chart courtesy of www.StockCharts.com

Even the oil cartel, the Organization of Petroleum Exporting Countries (OPEC), doesn’t seem that concerned at this moment, despite the fact that the breakeven oil prices for oil production are much higher for many nations. Saudi Arabia just agreed to sell oil at a discounted price to the United States. Perhaps this is a token of appreciation, given the U.S. help against ISIS. OPEC members were not involved in this move.

When oil prices broke below $80.00, I thought OPEC would cut some production. Now, as oil prices fall towards the $70.00 level, you have to believe the oil cartel will intervene and cut some production.

Domestically, there is simply too much on the supply side. We have the abundant fracking oil from North Dakota and Montana. Plus, the Republican-led Congress is set to vote on whether to build the controversial Keystone pipeline and allow oil from Canada’s tar sands to flow into the United States. My thinking is that unless we see disruption to the production side in the Middle East or storms in the domestic refineries, oil could be heading lower in the future.

But one thing is for certain: the decline in oil prices has helped boost businesses that count energy as a major cost, such as transportation companies, including trucking and airlines. The Dow Jones Transportation Average has been edging higher, helping to confirm the rise in the Dow Jones Industrial Average.

On the consumer side, we are also seeing much cheaper gasoline at the pumps, which will add to the money available for spending and allow consumers to travel more for shopping excursions.

Note the Dow Jones US Airlines Index in the chart below and its beautiful uptrend since November 2012, not to mention the bullish golden cross, too.

Dow Jones US Airlines Chart

Chart courtesy of www.StockCharts.com

Airlines and related companies are one group of stocks that will surely benefit from the lower oil prices.

In the airline sector, I like discount carrier JetBlue Airways Corporation (NASDAQ/JBLU) on the smaller end. For an international play, take a look at United Continental Holdings, Inc. (NYSE/UAL), which was formed from the merger of Continental Airlines and United Airlines in 2010.

In the building category, the “Best of Breed” is The Boeing Company (NYSE/BA), which has excellent growth prospects in China, the biggest airline market in the world going forward.

Finally, on the parts and services side, I like the suppliers of retrofit and new parts, such as B/E Aerospace, Inc. (NASDAQ/BEAV) and Spirit AeroSystems Holdings, Inc. (NYSE/SPR).

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