Oil recently saw its deepest plunge in more than three years in the international market, as fears of oversupply and a weakening demand outlook weighed on the market.
But, the drop in crude oil prices has been a blessing in disguise for aviation and refinery companies.
Brent Enters Bear Market, WTI Falls for 12 Straight Days
Brent crude, the global benchmark, was down 7.6% at $55.69 on Nov 13, deepening the descent into bear market — a drop of at least 20% from a recent peak. Brent futures, thus, have declined in 11 of the past 12 sessions.
December West Texas Intermediate crude also settled 7.1% lower at $65.47 a barrel on the New York Mercantile Exchange, its sharpest one-day fall since September 2015. The U.S. benchmark has now fallen roughly 30% for 12 consecutive days.
Key Factors Behind the Drop
Oil prices are becoming increasingly chaotic, thanks to ramped up production around the globe and weakening demand, particularly from developing economies.
Per the International Energy Association (IEA), the Organization of the Petroleum Exporting Countries (OPEC) had bumped up its production in September by 100,000 barrels a day to 32.78 million barrels of oil a day, which is a one-year high. In fact, output from OPEC members jumped by 127,000 barrels a day last month.
But, OPEC recently lowered its output forecast for this year and next, citing lower-than-anticipated growth in demand in Asia and the Middle East. President Trump reiterated that Saudi Arabia, a major producer, said that it would trim its exports to boost oil prices and avoid swelling supply. However, Trump tweeted that “hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!” That unfortunately reversed what looked like a recovery for oil on Nov 12 after two weeks of slump.
U.S. production, in the meantime, climbed by 400,000 barrels a day to a record 11.6 million barrels a day for the week ended Nov 2, adding to oversupply concerns. The supply-demand disparity, by the way, had already started to increase last month after the Trump administration decided to soften its sanctions on buying Iranian oil by granting waivers to eight buyers of Tehran’s crude. This drove oil prices lower into what would turn into an unprecedented decline.
Eugene McGillian, vice president of market research at Tradition Energy, perfectly summed up by saying that “basically, we’ve gone from envisioning tighter supplies six weeks ago to now expecting excess supplies on the market, and demand is starting to falter.”
Needless to say, it’s just not oversupply that’s disturbing. Weakening demand also gripped the oil market. After all, China, the world’s largest importer of oil and thus the largest driver of crude oil prices, is likely headed toward a massive recession. Chinese economy is in dire straits not just because of the trade war with the United States but also due to Beijing’s move to deleverage its financial system.
Aviation, Refiners Poised to Gain
Aviation stocks traditionally have an inverse relationship with the movement of oil prices. So, it isn’t surprising that shares of aviation firms are rising after the sharp drop in crude oil prices. After all, fuel costs are a major part of the operating costs for aviation firms; thus rise in oil prices will hit profit margins.
Refineries also stand to gain from this decline in crude oil prices. Refineries buy crude oil as their raw materials. So, refineries’ net cash flow declines if crude oil prices rise. Meanwhile, their net cash flow increases when crude oil prices fall.
4 Solid Picks
We have, thus, selected four such stocks from the aforesaid areas that are poised to make the most of the crude oil fall. These stocks also boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Spirit Airlines, Inc. (SAVE - Free Report) provides low-fare airline services. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for earnings rose almost 8% in the last 60 days. The company’s expected earnings growth rate for the current year is 9.9% compared with the Transportation - Airline industry's expected decline of 5.8%.
EnLink Midstream, LLC (ENLC - Free Report) focuses on providing midstream energy services in the United States. The Company is involved in natural gas gathering, treating, processing, transmission, distribution, supply and marketing, and crude oil marketing. The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for earnings soared 91.7% in the last 60 days. The company’s expected earnings growth rate for the current quarter is more than 100% compared with the Oil and Gas - Refining and Marketing industry's projected rise of 19.8%.
Phillips 66 (PSX - Free Report) is an energy manufacturing and logistics company. It operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The company currently has a Zacks Rank #2. The Zacks Consensus Estimate for earnings rose 8.7% in the last 60 days. The company’s expected earnings growth rate for the current year is 96.6% compared with the Oil and Gas - Refining and Marketing industry's expected increase of 8.6%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Air France-KLM SA (AFLYY - Free Report) provides passenger transportation services on scheduled flights. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for earnings increased 2.8% in the last 60 days. The company’s expected earnings growth rate for the next quarter is 30.3% compared with the Transportation - Airline industry's estimated decline of 48.7%.
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