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Why Falling Crude Oil Is Good for Automakers

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Dec. 4 2020, Updated 10:51 a.m. ET

Weakness in oil prices

As of June 14, WTI (West Texas Intermediate) crude oil futures are trading at $44.73 per barrel. Oil prices have fallen about 7.5% in June so far and 11.7% on a quarter-to-date basis. On June 14, the EIA (Energy Information Administration) reported that crude oil inventory levels fell to -1.7 MMbbls (million barrels). However, this drop in inventories was less than the market’s expectation.

In January 2017, WTI crude oil futures were trading at their highest level since August 2015. However, in March 2017, a sharp fall began in crude oil prices due to excess global inventories and increased production in the US.

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Technical analysis

Currently, technical indicators are suggesting a negative bias in the underlying momentum for crude oil prices. On the upside, an immediate resistance lies near $45.70 followed by a key resistance near $47.40. Technically, WTI crude oil prices could face a key horizontal support near the $43.30 price level, and a violation of this support could trigger further weakness.

Impact on automakers

The US demand for heavyweight vehicles such as trucks and utility vehicles went up in the first five months of 2017. Weak crude oil prices could be one of the primary drivers for this demand. Therefore, recent weakness in crude oil prices could continue to keep high demand for heavyweight vehicles intact going forward.

Heavyweight vehicles tend to have higher margins for automakers as compared to margins from small cars. Stronger demand for trucks and utility vehicles improves the profitability of automakers (XLY) including Fiat Chrysler (FCAU), Ford (F), General Motors (GM), and Toyota (TM).

Read Market Realist’s Analysts’ Recommendations for Auto Companies in June 2017 to learn what Wall Street analysts are suggesting for auto stocks.

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