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If you’ve been suffering from sticker shock at the pump lately, you're not alone. Nationally, there's been a sixty-cent-a-gallon increase in gas prices, on average, over the past year.
That's in large part because the price of a barrel of crude oil has risen from about $45 a barrel to more than $70 during that time. Some of it can be attributed to the relative health of the global economy, which is boosting demand. At the same time, though, there have been supply issues.
For instance, there have been production disruptions in Venezuela, which has been enmeshed in political and economic turmoil. There’s also the U.S.’s decision to exit the Iran nuclear deal and threatening sanctions against countries that do trade with Iran, the third biggest oil producer in OPEC (Organization of the Petroleum Exporting Countries). And there are other, more localized hiccups, which combined have helped raise prices to the point where President Trump has urged Saudi Arabia to increase production. Saudi Arabia, despite Trump’s proclamations, has yet to agree to do so.
Conventional wisdom says investors ought to be worried. After all, the higher costs that consumers must pay at the pump has to come from somewhere — and it usually means American households will have less to spend on other goods and services.
As an investor, though, you'll be surprised to learn that there are some positives in rising oil prices. While it may sting at the gas station, those extra cents you’re paying at the pump could actually boost your portfolio.
Corporate Profits Could Jump, Not Slump
It’s a common assumption that with higher oil prices, the cost of doing business will rise. Airlines and trucking companies, for instance, will have to pay more for fuel. That, in turn, means that the cost of producing and shipping goods across the country and around the world will increase.
That could have two potentially bad outcomes: Either companies will pass along those expenses to consumers, leading to greater inflationary pressures; or companies will eat the added supply chain costs, which could cut into corporate profits.
On paper, that seems like a lose-lose.
But while this may be true when evaluating individual companies — as some businesses will certainly feel a crunch — rising oil prices aren't always bad when considering the overall market, especially in the early stages of a price surge.
For instance, in the short run, rising oil prices are actually a boon for companies in the energy sector, and their gains can make up for some of the losses that other companies could suffer later on. Energy companies within the S&P 500 index, in fact, are expected to see their corporate profits surge 42% in 2018, compared to a more modest 12% rise for broad market, according to FactSet.
You can benefit through a fund that focuses on energy sector names, such as iShares North America Natural Resources ETF (ticker: IGE). The exchange-traded fund, which is in the Money 50 recommended list of ETFs, invests more than 80% of its assets in the energy sector, led by names such as Chevron and ExxonMobil. Over the past year, the ETF is up more than 17%, which is roughly three percentage points better than the S&P 500 index of U.S. stocks.
As for the rest of the market, the current shift hasn’t hit consumers’ pocketbooks to the point of halting demand, with consumer spending rising in May. In fact, because the improving global economy is one reason why oil prices are rising to begin with, you might consider economically sensitive sectors that do well as inflationary pressures rise. In addition to energy, those include basic materials stocks and shares of technology companies.
Meanwhile, oil prices aren’t rising nearly as fast in Europe and Asia. So this could be an argument for looking at multinational corporations with international exposure.
As long as prices don’t reach heights that hurt spending, then profits could continue to improve. And what's usually good for “For now, most economists would rather see oil prices climbing over $70 than dropping back down below $30,” says Jeffrey Kleintop, chief global investment strategist at Charles Schwab.
Rising Oil Prices Could Quell Some Tough Talk on Tariffs
President Trump's fight with America's allies over tariffs stems in large part to his frustration with the U.S. trade deficit. In other words, the President is upset that the U.S. imports far more than foreign countries purchase in American goods and services.
But here's the thing: Oil is one thing that can improve the amount we are exporting versus importing.
That's because the U.S. has made significant gains in becoming a net-exporter of refined oil and gas in recent years. And with oil prices increasing, this could boost the total dollar value of what American companies are exporting, thereby improving the trade imbalance — and political climate.
In the first quarter of 2018, as oil prices moved well above $60, non-petroleum trading deficit increased by $26 billion, according to Reuters, while the petroleum deficit improved by $4 billion.
Part of this is due to U.S. importing less petroleum in general as areas like the Permian Basin provide significant gains in local production. Since 2005, net imports of oil have dropped. This greater reliance on local production protects the U.S. from oil price shocks.
History Says Stocks Can Rise With Oil Prices
Conventional wisdom says that rising oil prices are a headwind for the economy and the markets. But you have to step back and consider the context.
That's what Bridgeway Capital did. The investment firm tracked historic oil price increases and decreases, calculating how they impacted the U.S. market from 1946 to 2012. Not surprisingly, when oil prices have fallen, the S&P 500 index has performed better, with a 16% rise, on average.
But when oil prices rise, the S&P still rise 10% average. Again, it has to do with the degree of the price increases.
Looking deeper and Bridgeway found that when oil prices rise but don’t jump too high, then the market sees a 15.5% return, which is nearly in line with the market's performance when oil prices fall.