A still-lukewarm U.S. economy, strong U.S. oil inventories and weakened Japanese energy demand soon may conspire to drive oil prices back down—and this presents an opportunity for transportation investors, says an equity analyst with Standard & Poor’s.
Walter Zimmermann, chief technical analyst at United-ICAP who covers a number of energy markets including crude oils and gasoline, has a slightly different tack. Oil prices are nearing a major longer-term, multi-year peak—but while oil prices are likely to peak soon if they haven’t already, Zimmerman suggests, gasoline prices stand a good chance of heading even higher.
What's the evidence that oil might be nearing a high, and why consider investment vehicles that could benefit from falling oil prices? “With oil still well over $100 a barrel, it may seem counterintuitive to look for mutual funds that have holdings in transportation stocks, since these are the companies normally most hurt by high and rising oil prices. However, oil prices are not likely to rise forever, and could be near a correction,” wrote S&P transportation analyst Jim Corridore (left) in a “Trends & Ideas” comment on Monday.
The U.S. Energy Information Administration reported that U.S. commercial crude oil inventories as of April 8 stood at 359.3 million barrels, above the upper limit of the average historical inventory range for this time of year. In addition, inventory levels are above where they stood this time last year, when oil prices were much lower, Corridore argued, saying: “We think that these statistics could support a drop in oil prices from where they are now.”
Using S&P's MarketScope Advisor website to screen domestic equity mutual funds with a four- or five-star S&P ranking with high exposure to top holdings in the transportation sector, Corridore pinpointed three mutual funds as good buys. All are still open to new investors and had at least two transportation names in their top 10 holdings.
1) Aston/River Road Dividend All Cap Value Fund (ARDEX) Five-star-rated ARDEX, focused on dividends and value, “might seem a strange place for transportation stocks,” Corridore wrote. However, he added, UnitedParcel Service and Norfolk Southern were both in the fund's recent top 10 holdings, and both pay a dividend. Some of ARDEX's other top 10 holdings are Waste Management, Automatic Data Processing and General Mills (GIS 37 *****). “We think this is a more rounded fund than the other two…but would likely still see a benefit if oil prices decline.”
2) Fidelity Select Transportation Portfolio (FSRFX) FSRFX is ranked four stars by S&P and focuses on the transportation industry. The fund's
top-10 holdings include UPS, Norfolk Southern, FedEx and Southwest Airlines. Among other positive attributes, the fund has a net expense ratio of 1.03%, comparing favorably to the peer average of 1.52%. The fund also ranked in the top quartile in terms of total return performance versus its fund category and versus its peers for the prior three-year period.
3) Fidelity Select Air Transportation Portfolio (FSAIX) With a more specific focus than the overall transportation sector, four-star-rated FSAIX focuses on the aerospace and airline space. Airlines use hundreds of millions of gallons of jet fuel a year. “We believe airline profitability and stocks would greatly benefit from a large drop in oil prices, were that to occur,” Corridore wrote. this fund's recent top 10 holdings include FedEx, UPS, Southwest Airlines and Boeing. FSAIX also has a net expense ratio of 1.05% versus a peer average of 1.52%, and ranked in the top quartile of its fund category and versus its peers for the past three years in terms of total return performance.
Oil Prices May Head Down, but Gasoline...
Zimmermann of United-ICAP presented his argument that oil is near a correction in an interview with AdvisorOne on Thursday. “In our bearish case, our target for pivotal resistance in domestic crude oil, known as WTI, is the $119 to $123 per barrel target zone” Zimmerman said Thursday. “We think it’s going to meet a major brick wall of resistance there, and we see a case for a significant retreat. However, this year, for technical reasons relating to price history and the difference between the various markets, there is a case for gasoline to go much higher even though crude oil may have already peaked out.”
Near term, Zimmerman’s target for NYMEX RBOB gasoline is $3.50 to $3.55 per gallon. Even if crude oil peaks at around $120, he said, there is a chance that RBOB could go quite a bit higher. And the reason for that is the U.S. dollar.
“We think it’s about to bottom,” he said. “In fact, we attribute the last few weeks’ upside in crude oil entirely to the fall in the value of the U.S. dollar. It has absolutely nothing to do with supply, demand, Libya, whatever. It’s all about the fall of the dollar. Month by month, week by week, day by day, hour by hour—you can see very clearly what crude oil prices are responding to. There’s a three-ring circus here: One ring is crude oil prices, one ring is the U.S. dollar, and one ring is economic expectations as embodied by the S&P 500 Index. The price of oil is now entirely in the hands of economic expectations and the outlook for the U.S. dollar.”
And if the price of oil defies Corridore’s expectations and continues to rise, how should investors play that rise?
“If you wanted to play the view that oil prices are going to continue to rise, then you’ll want to find funds with top 10 holdings in energy,” Corridore said in an interview on Wednesday.
Read “Saudis Cut Oil Production, Say Market Is Oversupplied” and “Brent Crude Oil on Rise, Tops $124 per Barrel” at AdvisorOne.com.