With the price of Brent crude oil continuing to fall, and the FTSE 100 back below its 50-day moving average, the UK market has had a wave of bad news recently. However, while some companies are making multi year lows, for others a falling Oil price could be a major success factor in the coming months.
The losers:
Commodity companies are the main victims of the oil price sell off. Bhp Billiton (LONDON:BLT), the multinational mining and metals company, has seen its share price fall to the lowest level since 2007 as the oil price decline sullies the entire commodity sector. BP Plc (LONDON:BP) is at a 3-year low, as a double whammy of the falling oil price and a ruling by the US Supreme Court that could expose BP to billions more dollars of claims from the Gulf oil spill, weigh on the stock. Supermarkets have also underperformed this year, however the reason is not down to the falling oil price, which could reduce costs for the UK’s supermarkets, and instead is down to increased competition from low-cost retailers.
The winners:
The obvious winners are the airlines. Ryanair Hldgs (LONDON:RYA) is making fresh record highs after recently upgrading its profit outlook for this year. The decline in the oil price could also bolster profits from next year, as some airlines will rush to lock in low prices for their future fuel needs. International Airlines Group (LONDON:ICAG) (IAG, formerly BA) may have underperformed its low-cost rival Ryanair, but its stock price is still at a 7-year high of 468p.
Research suggests that the current decline in the oil price could boost the airline industry by $10 billion, if the oil price continues to fall then the benefit to airlines could increase further.
The decline in the oil price is expected to trigger a GBP 1 per litre drop in the price of petrol here in the UK, which could give a much-needed boost to the consumer. A big beneficiary could be the consumer discretionary sector. Key stocks in this sector include Marks & Spencer Group (LONDON:MKS), Next Plc (LONDON:NXT), Dixons Carphone PLC, Sports Direct Intl Plc (LONDON:SPD) and home improvement company Kingfisher. Next issued a profit warning earlier this year after a warn autumn hit winter clothing sales.
However, retailers like Next and M&S, who depend on a bumper Christmas season, could see their fortunes change next year as the impact of a lower oil price is felt in the pocket of the consumer.
Conclusions:
The chart below shows Ryanair (yellow), IAG (white), BP (orange), BHP Biliton (red), Next (purple), M&S (green). This chart has been normalised to see how these stocks have moved together as the oil price has declined in recent months. As you can see, BP and BHP have under-performed, while Ryanair is the top performer and IAG has seen a sharp increase in its share price since October.
The drop in the oil price has had an immediate impact on some sectors (positive for airlines, negative for commodity producers), however, the impact on consumer stocks like Next and M&S has been muted, with Next drifting lower, and M&S making up for some lost ground earlier in the year, although it has not broken through any major levels. If you believe that the decline in the oil price could boost consumption in the UK then these Next and M&S may follow airlines higher early next year, albeit with a lag.
Figure 1:
Source: Bloomberg. PLEASE NOTE THESE PRICES DO NOT REFLECT THE PRICES OFFERED BY FOREX.com
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