Lower Oil Prices Can Benefit the Oil Industry
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The recent drop in oil prices may not be a bad thing for the oil industry. It might mean stocks go down in value for a bit, but it could also do wonders for the economy and this in turn could increase usage benefiting many of the oil and energy related businesses. Let’s take a look at the drop and see how a few companies are reacting to this sudden change.
Part of the drop was a reactionary move because the Feds hinted they could release oil from its reserves and flood the market to bring prices down. The same rumors surfaced again last Wednesday, and the White House repeated a general willingness to act. I am not sure if the White House had any influence upon Saudi Arabia, but one wonders on the timing. The country has offered customers in the U.S., Europe and Asia extra oil supplies to offset rising oil prices.
Oil tends to move with currencies, equities, and possibly Middle East turmoil. But a drop in price may not be a bad thing for oil companies and their related businesses.
What can Energy Stocks Do?
Companies need to balance present situations to future growth. Even though projected oil prices should remain low, any international incident in the Middle East can change that quickly. And if that does happen prices go up and companies can prosper, so they are not going to sit around and contract business. While prices go down, ExxonMobil (NYSE: XOM) is increasing its production acreage in the Bakken oil shale region in North Dakota. It is purchasing 196,000 net acres from Denbury Resources Inc. As with all purchases, it is subject to regulatory approval. It will increase XOM’s total holdings in this region by 50%.
Lower prices are not always a bad thing because the economy now has extra cash to instill into other products. When oil and gas prices go down, that frees up vital cash that was used in either commuting or transportation and can be used elsewhere. This could mean more mobility and more buying of gas and oil which will need to be moved. Midstream companies may benefit from this move. Companies like Kinder Morgan, Inc (NYSE: KMI) own approximately 75,000 miles of pipelines and 180 terminals. The company operates like a giant toll road and receives fees for its services, generally avoiding commodity price risk. Its customers include major oil companies, energy producers and shippers, local distribution companies. Energy Products Partners (NYSE: EPD) is another fee based midstream company. This company is one of the largest and heavily invested in natural gas, but will also benefit from more oil being moved. Most midstream outfits operate a business model based as much on fee-based contracts as possible, which means that unlike with our energy producers, it doesn't matter to midstream companies if the price of oil and gas falls to $1 or rises to $100.
This has a huge affect upon the price of big oil stocks also. Oil prices are expected to continue to deteriorate because of a dull world economy and rising U.S. supplies. Prices had continued to go up through the summer. Supplies were tighter and the continued tension between the west and Iran propelled prices higher. This was short term, but longer term the outlook is different. Over the next 6 months oil prices are supposed to continue down. And because of the way things are right now, a glut in oil should keep prices low from anywhere between (6-18) months.
We may see oil prices falling and they may continue to do this. But if this increases usage and more oil and gas is moved, it could be an eventual windfall for the energy related businesses. Short term negative reactions can lead to a long term better economy for all of us, even the oil and energy companies.
johnmylant has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Enterprise Products Partners L.P. and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.