For the American consumer, the fall in oil prices has been seen more at the macro-level than felt at the micro-level in many cases. It is a different matter for investors, however, both on the buy and sell sides.
Over the last year, United States Oil Fund (NYSEArca: USO), a major exchange-traded fund for oil, has plunged more than 45%. During the same period, United States Natural Gas Fund (NYSEArca: UNG), a major ETF for natural gas, has fallen over 50%.
The airline industry serves as an example of why investors, but not consumers, are benefiting a great deal from low oil prices.
Fuel is about 40% of the cost of operating an airline. A sharp drop in the price of such a major expense should be reflected in the stock price. That has certainly happened: American Airlines (NYSE: AAL) just reported a record profit of $932 million. As a result, its stock price has soared nearly 40% for the last year.
The stock price of Southwest Airlines (NYSE: LUV) ascended nearly 70% during that same period. It is much the same story for United Continental Holdings (NYSE: UAL) for the last six months and year, too, as the price of oil has collapsed.
The chart below show how the share prices of airlines have taken off as those for oil and natural gas have crashed.
|Last Six Months||Last Year||Year to Date|
|United States Oil Fund||-33.45%||-43.53%||0.74%|
|United States Natural Gas Fund||-31.29%||-40.30%||-8.87%|
But that has not resulted in lower ticket prices for consumers, however.
According to Airlines Recording Corp., the average ticket price is $454. That is a drop of just $2, less than one-half of 1%. The falling price of oil has been good for those owning the stock of airlines – not the ones buying the tickets. That is also the story for consumers in many other industries, as many companies have used the savings to increase profits, not reduce prices.
But for the overall U.S. economy, there is no denying the benefits of falling oil and natural gas prices. Greater supply from the U.S., which is producing record amounts of oil and natural gas, means that less capital flows overseas to import oil. These dollars stay at home, which creates more jobs.
So, what’s the play for speculators, traders and investors?
If you think the price of oil and natural gas will rise, go long on oil stocks such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) and short on airline stocks. The chart above clearly shows how American Airlines, Southwest and United Continental have all stumbled as United States Oil Fund has jumped. If oil continues to rise, airline stocks should continue to fall even more.
Jonathan Yates does not have a position in any of the securities mentioned in this article.
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