How Oil’s December Gains Affected the Auto Industry

Recovery continued in December

In December 2016, WTI (West Texas Intermediate) crude oil prices traded on a bullish note and inched up about 8.7%. In November, crude oil futures rose 1.5%.

At the end of November last year, OPEC (Organization of the Petroleum Exporting Countries) decided to cut oil production by 1.2 MMbpd (million barrels per day). This could be the primary reason for the December gains in oil prices.

How Oil’s December Gains Affected the Auto Industry

Negative for truck sales

Despite the recent boost in the adaptability of electric vehicles and alternative fuel powered vehicles, gasoline combustion engines are still the most common globally.

When we look at the recent trends in US auto sales (VCR), we’ll find a sharp rise in the demand of pickup trucks and utility vehicles. Sales-growth-wise, medium-weight vehicles have outperformed lightweight cars in the last couple of years. One of the key drivers behind this sales trend was lower oil prices. Therefore, sustainable gains in crude oil prices could hurt the demand for heavyweight vehicles.

Medium-weight vehicles such as pickup trucks and utility vehicles tend to have higher margins for automakers than lightweight cars, primarily because medium-weight vehicles are typically sold at a higher price. Therefore, a recovery in oil prices may hurt the demand for pickup trucks and utility vehicles.

The profitability of automakers such as Ford Motor (F), General Motors (GM), Fiat Chrysler Automobiles (FCAU), and Toyota Motor (TM) improves with higher demand for trucks and utility vehicles.

Auto industry’s 4Q16 earnings

The auto industry’s 4Q16 earnings season is about to start. GM, Ford, Fiat Chrysler and Tesla Motors (TSLA) are set to release their fiscal 2016 results in the next three to four weeks. Auto investors can stay updated on analysts’ earnings estimates by visiting Market Realist’s Autos page. You may also want to read What Do Analysts Expect from Fiat Chrysler’s 4Q16 Earnings?