Crude Oil Price Slump: 7% Hit for Global Hotel Stock Prices and 25% Hit for Dubai Hotel Revenues Is Predicted
Commodities / Crude Oil Dec 06, 2014 - 03:08 PM GMTBy: Andrew_Butter
There is an increasing adjustment to the idea that the “totally unexpected” slump in oil prices to below $70 may prevail for some time.
The model that predicted since 2011 Brent would, at some point, bottom at $67 which is just 3% below where it reached yesterday (not bad for a prediction made three years ago)... says the slump will last four years.
http://www.marketoracle.co.uk/Article47786.html
If the model that was 100% right in the past, continues to work...in the future, and there is indeed a four year slump...what is the likely effect on the tourism industry... supposedly the world’s largest industry?
This analysis looks at two timelines – (1) the stock price of Starwood Hotels (HOT) which is proposed as a marker for tourism worldwide, and (2) Dubai hotel revenues which represents a special case of tourism excellence and for quite a few years has been the fastest growing tourism destination in the world.
If you can build a model to explain the past, chances are the model can provide a basis for anticipating what might reasonably be expected to happen in the future. This is a model of the monthly average stock price of Starwood Hotels (HOT) since 2000 as a function of {Oil Price} and {S&P 500}
The model on just those two variables explains 95% of differences in stock prices and {Oil Price} explains 25% of the model (P<0.0001). Contrary to conventional wisdom, that’s a positive variable – in other words, historically, high oil prices appear to have been good for hotels.
The model says a drop in prices from $110 (Brent) to $70 will push the stock price down 7% below the reference point of tracking the S&P 500.
That suggests that any potential boost to tourism via lower aviation fuel costs will likely be more than offset by a decline in the number of fat-cats with petrodollars in their pockets buying a weekend break. In other words it looks like the main reason people go on holiday, and business/pleasure trips, is more to do with how much spare cash they got in their pockets, rather than the cost of aviation fuel; AND that the folks who benefitted from high oil prices had more cash in their pockets than other folk.
This is the model for Dubai:
The supply of hotel rooms (and services apartments) is not a statistically significant explanatory variable for revenues when tested along with {Oil Price} and {Oil Price Lagged One Year}. That says historically the market was and most probably will remain totally demand-driven, Dubai simply responded by building to meet demand.
Likely the reason for the remarkable correlation between oil revenues and Dubai Hotel Revenues is because 36% of guests come from either the region, or Russian-speaking countries, when petrodollars get scarce, those customers tend to stay home.
Likely the slump in hotel revenues will have a trickle-down impact on real estate prices, which are in any case quite dependent on oil-rich foreigners buying, as well as the general economic activity which is quite dependent on hotel revenues, as well as other oil-price related expenditure.
By Andrew Butter
Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe. Ex-Toxic-Asset assembly-line worker; lives in Dubai.
© 2014 Copyright Andrew Butter- All Rights Reserved
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