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Low Oil Prices: A Godsend for These Plastics Stocks

Written by Jason Stutman
Posted January 3, 2016

OPEC dropped a bomb last week in its annual World Oil Outlook (WOO) when it claimed oil prices would return to $95 a barrel from their current 11-year lows of $35...

But not until somewhere around 2040.

For investors looking to take advantage of the beaten-down energy market this year, that's certainly not a forecast to be taken lightly. OPEC has the reserves to keep oil prices near current levels for a considerable period of time, and due to the relatively enormous cost expenditures of fracking, many U.S. exploration companies are already struggling to keep their heads above water.

Not only is the upside for oil capped, though — the downside also remains substantial.

Here was the Bank of Montreal's response when recently asked if oil prices could collapse to $20:

"The short answer is ‘yes.’ We believe that crude oil prices could fall further unless global oil production is reduced... we estimate that the global oil market could be oversupplied by roughly 920,000 bpd in 2016."

And the position of Chicago-based oil markets consultancy Ritterbusch & Associates on the near-term action:

"A bearish trading stance is still being advised as we still view an ultimate price decline in nearby WTI and Brent futures to the $32.50 area."

No doubt oil prices could represent an attractive long-term buying opportunity for all the contrarian investors out there, but anyone expecting a sudden bounce back to 2014's highs of over $100 in 2016 would be setting themselves up for major disappointment.

The question, then, is what's the next best thing to come from the crippled energy market? How can you play low oil prices without having to take on the risk of further downside or stagnant prices?

One word%3A PlasticsOne Word: Plastics

Although plastics might not sound like the most exciting investment out there, it's certainly not an area you'll want to ignore now that sub-$50 oil seems likely to stick around for a while.

Falling oil prices may have created mayhem for the broader energy industry, but the plastic packaging industry is well positioned to take advantage of the situation for years to come.

According to BCC Research, the North American market for thermoplastic compounds reached 87.33 billion pounds in 2014. The market is expected to grow to 100.2 billion pounds by 2020, representing a modest compound annual growth rate of 2.4% over the next five years.

And while that's all fine and dandy, the bull case for plastics is not so much in increasing demand as it is in increasing profit margins...

Together, the plastic compounds polypropylene and polyethylene account for the vast majority of plastic resin purchases. The correlation between polyethylene prices and crude oil is a whopping 95%, which has no doubt led to meaningful margin expansion for plastic packaging companies and refineries.

Dow Chemical Company (NYSE: DOW), for one, posted record numbers earlier this year thanks to increased margins in its plastics business. The company has consecutively beat analyst estimates as wider margins in plastics (particularly in Europe) have made the company more profitable than ever before.

There are a number of other plastic packaging companies worth considering this year other than Dow Chemical too, including Berry Plastics Group (NYSE: BERY), Bemis Company (NYSE: BMS), and Sealed Air Corp (NYSE: SEE), all of which derive a substantial portion of revenues from resins.

A word of caution, though, for anyone who wishes to take advantage of low oil prices by investing in the plastics market: Now that oil is cheap and it's consequently cheap to make new plastic, China doesn’t want to buy our cruddy old plastic bags anymore. In fact, imports for used plastic are set to decline as much as 16% as full-year 2015 data comes in.

This means investors would be wise to stay away from cash-burning recycling companies, such as Appliance Recycling Centers of America (NASDAQ: ARCI), or perhaps to even consider them as attractive short positions.

At the very least, you'll want to seek out high-yielding plastic companies such as those listed above.

Until next time,

  JS Sig

Jason Stutman

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