The precipitous drop in crude oil prices since last summer caught most analysts by surprise and that has left investors wondering how to play the move. Since peaking last June, oil prices have declined by 28 percent as measured by West Texas Intermediate oil prices which have tumbled from $103 down to just $75 per barrel as of this writing. While oil prices have historically been quite volatile, this recent slump ranks as one of the steepest over the past decade.

Prior price plunges have been associated with major macroeconomic shocks. For example, oil fell almost 30 percent in the first half of 2012 when the European debt crisis sent the troubled region down to its nadir. But this time around falling prices cannot so easily be pinned on a specific world event. In fact, one could argue that escalating tensions in the Middle East over the Islamic State insurgency and threat to local oilfields should actually be pushing prices higher.

Instead, the primary drivers of this year’s lower energy prices appear to be the perfect storm of a strengthening US dollar, weaker global growth and accelerating energy supply growth both inside and outside of the Organisation of Petroleum Exporting Countries (Opec). On the supply side, Saudi Arabia has not been cutting back production while Libya has ramped oil output up by over a half million barrels per day after rebels shut down fields last summer. Furthermore, new energy finds in North America through fractured drilling represent a powerful new dynamic.

To many analysts, resurgent North American oil production has been a paradigm shifting event. According to BCA Research: “..the structural growth in non-Opec sources of petroleum, most notably the US shale industry, has left the market for crude extremely well supplied in the face of slowing global demand, and has certainly exacerbated the decline in oil prices.”

Meanwhile, oil has historically traded inversely to the direction of the US dollar which lately has been soaring. Global funds are flowing back to the greenback, enticed by America’s higher interest rates and relative economic stability. Moreover, just as the US Federal Reserve has begun to telegraph an imminent rise in interest rates, Japan and Europe continue to forge in the opposite direction of applying even more monetary stimulus. These oddly divergent policies have sent the greenback on a sharp uptrend while oil and other commodities continue to soften.

And finally, global growth has been slowing for most of this year which may ultimately mean less demand for energy. Just last month, the normally optimistic International Monetary Fund (IMF) cut its forecast of global growth down from four percent to 3.8 percent. China, a major driver of global trade for past two decades has decidedly slowed. The world’s second largest economy recently reported its gross domestic product grew at a 7.3 percent rate in the third quarter, the weakest rate since the first quarter of 2009. Falling residential property prices and decelerating export growth are concerns.

While the near-term outlook is for weaker energy prices, there are some notable counterbalancing forces. In terms of fractured drilling, Wells Fargo strategist, Paul Christopher published a recent note stating: “The extra US production does not add much too new excess supply. If Opec would only cut by 500,000 barrels per day (1.5 percent of its daily output), it could effectively erase the contribution of this year’s gain in US production.”

Within the various macroeconomic cross currents impacting the commodities markets, decelerating global growth is perhaps the trickiest factor to resolve. One interesting point, however, is that decelerating global demand growth masks the underlying secular trend of increasing automobile penetration rates in many developing nations. The rising middle class in emerging markets around the world are becoming more mobile and therefore requiring greater quantities of gasoline to run their new cars and trucks.

Also, in the short run the coming winter season tends to be a seasonally strong period for energy prices as heating oil demands increase.

Of course Opec is always a wild card and this month some economists were surprised by the lack of response from the cartel. Many thought Opec would come back into the market and support its interests at $80 per barrel, and yet prices have been allowed to fall further.

Some believe additional supply from Saudi Arabia represents an agreement with the US to punish the wayward, oil-dependent nations of Russia and Iran for their recent aggressions.

Overall, continued near term pressure on energy prices seems probable. We are likely to see oil prices rangebound for now at these lower levels in the months ahead, but that might be a good thing for investors!

First of all, lower commodity prices represent a major tailwind for most of the world’s largest economies and consumer product companies in developed countries are already benefiting from lower costs. Falling gasoline prices act like a major tax refund for consumers, putting extra cash in shopper’s pockets just as we approach the key pre-Christmas retail selling season.

Interestingly, the S&P Consumer Discretionary sector has lagged the broad S&P 500 stock index by almost eight percent this year, but that could change. Automobile companies Ford, General Motors and Daimler are all trading well off this year’s high prices despite strong fundamentals and reasonable valuations. All three pay dividends in excess of three percent, a rate significantly higher than a ten-year US Treasury bond which pays just 2.3 percent today.

Other industry sub-sectors stand to benefit even more directly. For example, transportation stocks are worth a look in this lower-priced energy environment. I wrote in this column about airline stocks (“Airlines are Taking Off”, September 16, 2014) and why this is could be an intriguing opportunity. Today, with meaningfully lower fuel prices, the thesis remains even more compelling.

In terms of direct investment in energy companies, opportunities are available for those with a longer term time horizon.

Within the energy sector, the major integrated oil companies perhaps have the best chance of weathering this environment. The largest global integrated energy companies including Exxon Mobile, Chevron Texaco and ConocoPhillips have many levers to pull in terms of enhancing shareholder value.

Most of these companies possess strong balance sheets, pay large stock dividends and have plenty of free capital to keep buying up their own shares. The majors are also likely to appease investors by selling non-strategic assets, reducing spending on marginal projects and buying up cheap assets to improve return on capital.

Bryan Dooley, CFA is a senior portfolio manager at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information.

This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.