Oil Prices Surpass $80 Per Barrel Amid Rebounding Demand
Oil Prices Top Seven-Year High
Oil prices climbed past $80 per barrel in intraday trading Monday as demand for oil continues to surge across the globe. At its current price, oil is trading at a high not seen in seven years. Since the end of October 2020, US crude prices are 120% higher.
Though prices for other commodities like copper are also climbing, the spike in oil and natural gas prices has been more significant. This year crude is on track to outpace copper by its largest margin since 2002. Oil is also besting an index of raw materials by its largest margin in more than 10 years.
Oil Companies Keep Supply at Bay
The rise in oil prices does not appear to be slowing. Shortages of natural gas and electricity are creating global outages and companies are slowing down production at plants, which is expected to drive more demand for oil as power plants look for alternatives to natural gas for generating electricity.
Even if consumers scale back on travel and consume less energy in the face of skyrocketing oil prices, crude prices are still expected to continue climbing. A big reason for these trends is pressure on oil companies to curb spending, limit the negative impact on the environment, and return money to investors. As a result, oil companies are not expected to boost supply enough to drive oil prices lower.
Other Factors Lifting Oil Prices
Some investors who previously avoided the energy sector because of the impact oil has on the environment and because of lackluster returns in the past are now trying to get back into the sector. Investors are working to ramp up their exposure to what is turning out to be one of the highest-performing investments of 2021. Of S&P groups, the S&P 500 energy sector has been a top performer, up 50% so far in 2021. Pioneer (PXD), Occidental (OXY), and Diamondback Energy (FANG) are leading the gains.
Oil prices have been surging since last fall and are only expected to increase more as we head into winter. It will be interesting to see if oil companies will increase supply eventually.
Why Portfolio Diversification Matters
It may be tempting to concentrate your money in a few familiar sectors or in companies for which you have a personal affinity. But putting all your eggs in one basket makes you vulnerable. To attain a diversified portfolio, it’s important to partake in asset allocation, or invest in a variety of asset classes, based on your available capital and risk tolerance.
Diversification is the process of buying assets that are hopefully non-correlated; the performance of one is not necessarily related to the performance of the other. For example, you could build a portfolio of stocks and bonds, two non-correlated asset classes.
To do this, you can buy stocks and bonds directly, or you can buy them within funds. Funds can provide a way to achieve a diversified portfolio because they bundle many different investments together.
One fund could hold hundreds or even thousands of stocks, bonds, or other investments. For example, an S&P 500 index fund invests in the 500 leading companies in the United States. But the variety of funds doesn’t stop there. There are funds that invest in countries and industries all over the globe.
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Rising Vehicle Prices May Not Offset Dip in Sales
Demand for New Cars Drops
Surging prices for new vehicles may no longer be enough to lift the entire auto industry amid a decline in demand for new cars. After months of record sales and profits, vehicle makers’ luck seems to have turned in September. Last month, 12.2 million light vehicles were sold, the lowest in more than 10 years, except for the spring of 2020 when chip shortgages and COVID-19 forced plants to close.
Though the entire industry is facing challenges, some vehicle makers like BMW (BMWYY) are doing better than others such as GM (GM). Success for some carmakers is hinging on access to supplies of chips.
BMW Pulls Ahead
BMW has been benefiting from rising prices for its new and pre-owned vehicles in recent months. So much so the vehicle maker raised its implied profit target for this year, saying higher prices will make up for declining car sales.
Unlike some of its rivals, BMW has not been hit as hard from semiconductor shortages—partly because BMW has long outsourced component production and as a result has more experience managing supply chains than some of its rivals.
On the other hand, GM is underperforming. Wall Street bracing for the automaker to post weak profits in its third quarter. Part of that is due to a recall of GM’s Bolt EV. Semiconductor shortages are also weighing on the company’s bottom line.
Hyundai Sees an In
With inventory shortages persisting, there is an opportunity for Hyundai (HYMTF) and Kia, its vehicle affiliate, to gain market share from struggling rivals. As of the third quarter, Hyundai and Kia’s market share stood at a record 10.8%. Toyota (TM) is in first place in the US with a 16.5% market share, while GM’s market share has fallen to just 13.1%. A lack of vehicle supplies is causing buyers to look at brands they may not have considered in the past.
Despite the lack of inventory, US car dealers are still making money. Dealers collectively made $4.2 billion in profits from new vehicle sales in September, which is a record for the industry. It will be interesting to see which companies and dealers can keep up the momentum amid shortages.
Demand for Private Jets Soars
Boeing, Bombardier, and Other Jet Makers Stand to Benefit
With demand surging for corporate planes, jet makers from Bombardier (BDRBF) to Boeing (BA) are poised to announce a substantial amount of new orders at the industry’s biggest trade show which is taking place today. The demand for private jets is so red-hot that some fractional plane ownership and plane charter companies have been turning away business.
To get the situation under control ahead of the busy holiday travel season, charter plane operators and fractional ownership companies are investing in more planes, creating a boon for companies which make small passenger planes.
NetJets Invests $2.5 Billion in Planes
NetJets, a large global private jet company, is spending $2.5 billion to purchase 100 new aircraft, with deliveries beginning now and lasting through the end of next year. Demand for NetJets’ services is at an all-time high, with the company flying about 500 flights per day compared to fewer than 400 in 2019.
NetJets has faced significant difficulties dealing with the spike in demand. In response to surging demand, the company has already halted sales of cards which enable customers to pre-pay for flight hours. These trends are having ripple effects across the airline industry supply chain. Fly Exclusive, which supplies the charter industry with planes, is also seeing a huge uptick in requests from customers which are running low on jets.
Customer Service Headaches
The shortage of private jets is also creating a customer service nightmare for the charter and fractional share companies. Wealthy travelers used to getting a plane whenever they want it are growing frustrated when planes are not available. Meanwhile, due to low inventory of planes, the plane companies have less flexibility to deal with last-minute cancelations or delays when clients get stuck.
In the late stages of the pandemic, even very wealthy travelers are dealing with travel difficulties. It will be interesting to watch how private jet companies respond to these trends.