NEW YORK (TheStreet) -- The precipitous decline in oil prices actually began five months ago, but it has only recent gotten steep enough to capture everyone's attention. With prices now down 40%, investors and consumers are wondering what happened and how long this trend is likely to last.
There's some speculation that OPEC may have helped worsen the price decline in order to undermine U.S. production -- and that it may have backfired. Here's a short timeline on how oil fell so fast and who the winners and losers are.
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WTI closed Friday's session below $70.
Three months ago
Oil was down 10% from its July high, and there was speculation that because oil is traded in U.S. dollars, strength in the dollar was putting downward pressure on prices. Brent crude was 10% off its July high of $115 per barrel at this point.
Two Months Ago
Oil was down 20%, and the most likely culprit seemed to be weakening global economic growth (deflation), and therefore weakening demand for the world's most used and watched commodity.
One Month Ago
Oil was 30% below its most recent peak, and it looked like there must be additional forces at work. It was suggested that perhaps the OPEC nations--and Saudi Arabia in particular -- were launching a sort of "oversupply attack" on their newfound American competition.
By flooding the market with more oil than necessary, the Saudis have been able to manipulate the worldwide price down to levels where it is not profitable for many producers to explore, drill, and refine -- particularly for smaller, newer producers. With the U.S. now generating 9 million barrels per day, the reasoning is obvious.
With a barrel of oil costing 40% less than it did just four months ago, and at this point it seems clear that the OPEC member countries are extremely concerned about the rapid growth of U.S. shale production.
Who are the winners?
The consumer and consumer discretionary names are the obvious beneficiaries of cheaper oil. Lower prices at the pump means more dollars leftover after fixed expenses. This means stretched consumers may not need to think as hard about taking that road trip, buying that one extra gift, shopping at Whole Foods instead of the traditional supermarket, or treating themselves to a nice dinner.
Stocks that benefit are all the places where that extra money gets spent -- think J.C. Penney Co (JCP) , Macy's (M) , Whole Foods (WFM) , and Darden Restaurants (DRI) . Also benefiting are the airlines, which instantly become more profitable. Look at Delta Air Lines (DAL) , Southwest Airlines (LUV) , and United Continental Holdings (UAL) .
If you feel this trend is likely to continue, you may also choose from one or some of the following ETFs: iShares Global Consumer Discretionary (RXI) , iShares US Consumer Goods (IYK) , SPDR S&P Retail ETF (XRT) , Vanguard Consumer Discretionary (VCR) , and/or the iShares Transportation Average (IYT) .
And the losers?
Lower oil prices mean lower profit expectations for drillers and refiners, not to mention anybody selling services to drillers and refiners. As a result, we've seen some pretty severe destruction in names like Chevron (CVX) , ConocoPhillips (COP) , ExxonMobil (XOM) , and the index in which these are three of the largest holdings-the Energy Select Sector SPDR ETF (XLE) . The index fund is down 20% from its recent high of $100 in early July.
XLE was at this level a month ago, and at $80 the fund's annual yield is now at 2.23%, still better than the 10-year US Treasury note Friday.
Other losers include, but are not limited to, the major oil-exporting nations -- that means Russia (40% of its GDP is tied directly to oil and natural gas exports,) and nearly all of the OPEC members, especially Saudi Arabia (responsible for 9.6 million of OPEC's 30 million barrels daily). You can find detail on OPEC production figures and trends on page 54 of their most recent report here.
The fact is, Saudi Arabia is losing money with oil prices at current levels. According to the chart below from Citigroup, in fact, any price below $98 per barrel makes the Saudis' largest export a loser.
Conversely, the majority of U.S. shale projects will still break even all the way down to $70 a barrel.
How long can Saudi Arabia tolerate losses on this level? I don't know. But there is an enormous amount of pressure building here. It seems they are concerned enough about their prospective loss of market share to play Russian roulette with the rest of the world.
Since this is unlikely to resolve itself in the very near term, investors may want to consider taking strategic tax losses in energy-related names with the intent of re-entering in the new year.