As oil prices continue to drop, certain industries stand to benefit. These fall into two main categories. The first should come as no surprise: industries, like airlines and transportation, for which oil is a direct and significant cost (lower oil prices improve their profitability). The other industries that benefit from lower oil prices are those that are dependent on consumer spending. When consumers spend less on fuel, they have more disposable income for other purchases.
In the Spring of 2020, oil prices collapsed amid the COVID-19 pandemic and economic slowdown. OPEC and its allies agreed to historic production cuts to stabilize prices, but they dropped to 20-year lows. Another result of the pandemic during this same time frame was a sharp drop in shares of airlines and other transportation companies, as global and domestic travel slowed dramatically. In this instance, low oil prices did not benefit these companies.
To properly evaluate how these industries fare during low oil prices, we must first set a time period that corresponds with the fall of oil prices. On June 20, 2014 crude oil reached a multi-year high of over $107 per barrel. Thirteen months later, on July 29, 2015, crude oil was trading around $49 a barrel, a decline of 55%. Over this period, the Standard & Poor’s 500 Index (S&P 500) advanced 7.4%, while sectors that benefit from lower oil prices, such as consumer discretionary and consumer staples, outperformed the S&P 500 with gains of 20.5% and 10.9%, respectively. In this article, we’ll discuss the five industries that have benefited the most from low oil prices.
- Airlines: Airlines are among the biggest beneficiaries of lower oil prices because jet fuel is one of their biggest expenses. Airline stocks registered strong gains in the second half of 2014 as oil prices plunged. However, some of these gains were tempered when crude oil rebounded in the second quarter of 2015. Southwest Airlines Co. (LUV) and Delta Air Lines Inc (DAL) posted gains of 30.1% and 11.6%, respectively, over the period beginning June 20, 2014 and ending July 29, 2015. In comparison, the S&P 500 Industrials Index declined 1.3% over that same period.
- Transportation: Shipping and freight companies also benefit from lower oil costs since fuel costs are a significant expense for those industries. Among freight companies, FedEx Corp (FDX) has gained 16.0% since June 2014. However, low oil prices are by no means a guarantee for stock gains. During the same period, FedEx rival United Parcel Service Inc (UPS) has declined almost 2% because operating issues overshadowed the benefit of lower oil prices.
- Consumer Discretionary: This sector includes companies in retail, travel, entertainment and restaurants. These businesses benefit indirectly from lower oil prices, as consumers looks for places to spend the money that they save on fuel. The sizzling stock performance of companies such as Netflix Inc (NFLX, +70.3%), Darden Restaurants Inc (DRI, +53.8%), Starbucks Corp (SBUX, +50.1%), Royal Caribbean Cruises Ltd (RCL, +48.9%), Walt Disney Company (DIS, +44.7%), Expedia Inc (EXPE, +36.5%) and Carnival Corp (CCL, +33.2%) can partly be attributed to the positive impact of lower oil prices on profitability.
- Consumer Staples: Although consumers are more likely to spend their fuel savings on the fun stuff, part of the expanded budget will also go towards food and drink. As a result, companies like Constellation Brands Inc (STZ, +35.6%), Dr Pepper Snapple Group Inc (DPS, +32.4%) and Costco Wholesale Corp (COST, +26.0%) have easily outperformed the S&P 500 since June 2014. (For related reading see A Guide to Investing in Consumer Staples.)
- Automobiles: Low oil prices means that consumers will opt for larger and more expensive vehicles (like SUVs and trucks) over smaller, fuel-efficient models. Based on robust sales in the first half of 2015, new-car sales for the year are on track to exceed 17 million. If consumers follow through on the prediction, that would make 2015 the highest automobile sales year in a decade and the third-best year in history.
The Bottom Line
Low oil prices have benefited a number of industries. Unsurprisingly, industries like airline and transportation that count oil as a direct cost have seen their stock prices rise. However sectors that benefit indirectly from low oil prices, like consumer discretionary and consumer staples, have done even better.