You may have noticed that your wallet is getting a bit fatter these days. Sadly, taxes haven’t gone down, but at least the cost of your morning commute has.
Gasoline prices have fallen by the wayside lately and in some areas they’ve recently hit lows not seen since the end of the Great Recession — four years ago.
According to AAA, the average gasoline price for regular unleaded across the U.S. is now $3.51 cents per gallon. That’s about 3 cents cheaper than a week ago and nearly 12 cents cheaper compared to the same week last year. What’s more, some areas are experiencing gasoline prices as low as $3.20 per gallon.
And according to the automobile club, we might be in for even lower prices down the road. AAA even believes that we could see sub-$3 per prices by the end of the year. That’s a sharp reversal from just a few months ago, when prices were steadily rising.
While that’s awesome news for our wallets and gas tanks, it does have several investing implications for portfolios. And one group of energy stocks have the ability to profit handsomely from the lower gas prices.
Lower Prices Equal Bigger Margins For These Energy Stocks
The reason for low gas prices is simple: We have an abundance of gasoline supplies.
Refineries are running at full tilt as fracking continues to uncover a virtual ocean of oil from the nation’s various shale formations. That glut of cheap oil is translating into cheaper and cheaper gasoline. At the same time, Americans are using less of it. From higher fuel efficiency standards on automobiles and more businesses allowing telecommuting to more Americans abandoning car ownership altogether, we’re simply using less gas. The result is a declining price environment for petrol.
As long as oil costs remain stable and refinery production continues to remain strong, gas prices should continue on their trajectory downwards for the rest of year. That’s not exactly “super” news for refiners like Valero (VLO) or domestic-focused E&P firms like EOG (EOG). But it’s great news for the owners and operators of service stations and convenience stores.
While it may sound counter-intuitive, higher prices for gasoline actually hurt the operators of service stations. That’s because margins per gallon are very thin — around 3 to 15 cents — and as the cost of buying that fuel from refiners goes up, service station operators actually make less money per gallon. That profit margin drifts into loss territory when you add in the high cost of credit card processing fees.
For example, if it costs $50 to fill up and the credit card fee is the standard 1% of the sale price plus 10 cents per transaction, it costs the service owner 60 cents. But if the price of gas goes up and it now costs $60 for the same amount of gas, the fee is now 70 cents. When gas prices peaked in 2008, the Petroleum Marketers Association saw a mass wave of smaller mom & pop service stations go under from the strain of these fees.
Lower gasoline prices actually give the service station operators some room to run, meaning they’ll be at the top of that profit-per-gallon range. In addition, lower gasoline prices provide an extra boost to the convenience store owners — more cash for consumers to play with. Many service stations will lean on their food, soda and cigarette businesses in order to boost profits. By spending less on a tank of gas, consumers will have a few more dollars to go buy a cup of coffee or Snickers form inside the shop, boosting profits further.
So, which stocks have the most to gain from lower gas prices?