What Falling Gas Prices Mean for the Hotel Industry
Oil prices stay put at $50 per barrel
Crude oil prices rose steadily from August 2016 to December 2016, but they’ve remained almost flat in 2017. After rising 8.7% in December to $53.72, crude prices fell 2.3% in January 2017 to $52.81 then rose 2.4% to $54.01 in February 2017. Crude is currently trading at ~$52.83.
Interested in HLT? Don't miss the next report.
Receive e-mail alerts for new research on HLT
The 8.7% rise in December came after OPEC (Organization of the Petroleum Exporting Countries) agreed to cut its oil production by 1.2 million barrels per day. Other non-OPEC countries also agreed to cut production by 0.6 million barrels per day, giving rise to hopes that the oil price war started by Saudi Arabia over two years ago might finally be coming to an end.
Despite the fact that OPEC has largely complied with its production cut plan, oil prices haven’t risen. Though OPEC oil inventories have been falling, US oil inventories are steadily rising. Also, Russia has cut production by only 100,000 bpd (barrels per day) as opposed to its promised 300,000 bpd.
What to expect?
In short, the oil oversupply problem remains, and with sanctions in Iran over and China teaming up with other countries to increase oil production, production capacity will likely remain high.
Oil prices aren’t expected to rise significantly and may, in fact, fall further if the supply problem gets worse. Thus, most investors have been expecting airfares to fall, which was the case in 4Q16 as well.
Falling ticket prices are good for the hotel industry, as falling prices reduce the total cost of taking vacations. However, most airlines seem to have realized that pricing and capacity discipline are important to remaining profitable. Thus, the chances of airfares falling during the year look bleak. On the contrary, major carriers have been increasing their airfares. In fact, according to the latest data from the U.S. Department of Transportation, airfares have risen month-over-month for December 2016 and January 2017.
On the other hand, travel demand is expected to rise given rising disposable income, which bodes well for the hotel industry. Investors can gain exposure to hotel stocks by investing in the Consumer Discretionary Select Sector SPDR ETF (XLY), which holds 0.63% in Marriott International (MAR) and 0.38% in Wyndham Worldwide (WYN). Other major hotel stocks include Hilton Worldwide (HLT) and Hyatt Hotels (H).