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Profit From Falling Oil Prices

Posted September 18, 2014

Last month, I predicted that oil was heading lower.

All is going as I foretold.

On Tuesday, WTI hit a two-year low just above $92 a barrel. Brent was down to $98 per barrel yesterday, down from $114 last year.

Furthermore, the uptrend has been breached, which suggests we are headed lower still.

The most obvious reason for falling oil prices has to do with supply and demand. Global oil demand is the weakest since 2011, and at the same time, the U.S. shale boom continues to increase production.

Juxtaposed to this idea is the fact that the U.S. dollar is also moving higher. Below, you will find a five-year chart of the dollar ETF (NYSE: UUP) compared to the oil ETF (NYSE: OIL).

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For the most part, when one goes up, the other goes down — all courtesy of the petrodollar complex. Right now, the dollar is rising and oil is falling.

Falling oil demand is due to an economic slowdown in Europe, China, and Japan, coupled with high money printing in those economies. And Scotland breaking off from England has investors fleeing the pound.

Obviously, investors want a strengthening currency and an expanding economy — thus they buy dollars, which makes them dearer.

Who Wins?

That's all well and good, but I'm not here to give you the relative merits of foolish central banks. I'm here to help you make money. To do that, you have to ask yourself who will benefit from falling oil prices and how can you profit from it.

My favorite falling oil price plays are transportation stocks. Companies with high fixed costs in jet fuel or diesel will benefit when those costs go down, as their margins and profits will go up. It's the great teeter-totter of investing.

These stocks are already starting to move. United Parcel (NYSE: UPS), for example, is up 1.8% today. FedEx (NYSE: FDX) jumped 3.41% today after it beat on earnings, revenue, and margins. Plus, it said it was raising prices.

Other companies that benefit from falling oil prices are airlines. Southwest (NYSE: LUV) has tripled this year. JetBlue (NASDAQ: JBLU) has doubled. But I hate airlines and never buy them — too much off balance sheet stuff.

Off a Short Pier

My favorite companies to buy on falling oil prices are the cruise lines. Royal Caribbean (NYSE: RCL) has been on fire all year. Yesterday, it was up 1.87%.

RCL is still undervalued relative to growth, as it has a 0.72 PEG ratio and a new line of high-end ships being launched in November. Norwegian Cruise Line Holdings (NASDAQ: NCLH) also looks solid and is just below all-time highs.

Falling oil prices also benefit Joe Six-pack. Less money in the tank means more money in the bank. And nobody ever lost money betting against the America saver.

The good news is that the retail sector has been beat up pretty good over the last two quarters. I've been buying calls on a number of retailers in my Options Trading Pit service as bet on a strong Christmas. For example, my readers banked 87% gains in a month on PVH, the company that owns Calvin Klein, when it announced a robust second quarter.

Mattel inc. (NASDAQ: MAT), the maker of Barbie and Hot Wheels, is on my radar. The share price has dropped 40% since the start of the year and looks like a great buy here with a P/E of 13 and a 4.30% dividend.

If I get a chart confirmation, I will buy some calls on Amazon (NASDAQ: AMZN) as well. FedEx is saying it beat earnings in large part due to a surge in online retail traffic.

But that takes us back to the cruise lines. They will benefit from lower oil costs as well as higher consumer spending.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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