For Airlines, More Oil Means More Profits

New oil supplies could be ready to drive down a major airline expense.

Jan 4, 2014 at 9:29AM

Airlines are massive consumers of jet fuel and, therefore, oil. In fact, fuel is one of the largest expenses at virtually all airlines, and the volatility of oil prices is one of the top risks of owning airline stock as an investment. But an expected increase in supply could drive oil prices sharply lower over the next couple years, and that potentially means big gains for airline shareholders.

Recent reports by Libyan officials suggest that the African nation could soon vastly increase its oil exports. Political instability has rocked the nation over the past few years and estimates have often proved too optimistic in the past. This time officials have raised hopes that a major oil field shut down by protesters last year may begin production again.

The message was heard loud and clear among oil traders as the Libyan news contributed to a drop of around 5% in various oil benchmarks. Lower oil prices provided a boost to airline shares the same day helping to push shares of Delta Air Lines (NYSE:DAL), American Airlines Group (NASDAQ:AAL), and United Continental Holdings (NYSE:UAL) all up around 5%.

Restrictions on foreign investment in Mexico's oil fields are expected to be lifted and the result could be a major increase in North American oil production. Citigroup forecasts that the effects could be the equivalent of adding an amount of oil production equal to that of Nigeria. Bloomberg notes that there could be regulatory and infrastructure delays stemming from the new regulatory environment and the current shortage of pipelines.

Although increased Mexican oil production is not being felt in prices now, it could mean a significant supply increase in the future. It will likely be at least a couple years before Mexican oil production is fully up and running but for long-term investors, it could be a major positive.

United States
One of the biggest stories of North American oil production is being seen in shale oil in North Dakota. Large amounts of Bakken crude are helping to reduce the total oil imports of the U.S. while increasing the total oil supply available.

Stories of explosions from rail cars carrying Bakken crude have come out lately and the issue will need to be addressed. However, while it may put near-term pressure on production expansion, I do not see it halting production in the long-term. For now, regulatory agencies are investigating and putting pressure on rail companies to better label and contain shipments of Bakken crude.

Bakken crude is particularly important for Delta Air Lines which looks to capitalize on its cheaper price compared to other oils. Since Delta acquired the Trainer oil refinery, the airlines is now able to refine oil into its own jet fuel. Since Bakken crude trades at a discount to other oils, Delta can boost profits at Trainer by using Bakken crude to refine into jet fuel.

Fuel savings
Airline stocks fall into a category of investments that can be sharply driven up or down based on the cost of oil. With increases in supply expected to come on line from Libya, Mexico, and the United States, oil prices could slide in 2014 boosting airlines' bottom lines. Potential risks still exist including natural disasters and civil unrest but, barring these events, I see lower oil prices as another factor benefiting airlines in 2014.

Who will produce the energy?
Record oil and natural gas production is revolutionizing the United States' energy position and finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Alexander MacLennan owns shares of AMERICAN AIRLINES GROUP INC and Delta Air Lines and has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, long January 2015 $17 calls on AMERICAN AIRLINES GROUP INC, long January 2015 $40 calls on Citigroup, and long January 2015 $45 calls on Citigroup. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information