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Oil Prices Drop Like a Stone: Winners & Losers

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In recent times, oil prices may have risen in one or two trading sessions. But, those are dead cat bounces! Lest we forget, oil has now lost nearly a third of its value amid volatility since early October.

For instance, the West Texas Intermediate (WTI) crude settled at $51.56 a barrel on the New York Mercantile Exchange on Nov 27 from a high of $76 a barrel reached on Oct 3. Some market pundits now caution that oil prices might be echoing the pattern of a few years ago, when oil prices had tanked more than half, from $90 a barrel in November 2014 to $41 in January 2016.

But, what led to the steep decline? Doubts about the Organization of Petroleum Exporting Countries’ (OPEC) resolve to curb production amid supply overhang and demand uncertainty have come together to push oil prices down.

OPEC, led by Saudi Arabia, recently showed interest in trimming its output in order to stabilize prices. However, Saudi Arabia ramped up production to all-time high in November, pumping 11.1 million to 11.3 million barrels per day (bpd) during the month. Confirmation that U.S. production is booming, especially doubling in shale production since 2012, has also led to the latest oil price retreat.

The supply-demand disparity, in fact, started to increase after the Trump administration decided to relax sanctions on the purchase of 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.

President Trump, by the way, has been rooting for lower oil prices and has warned Saudi Arabia to avoid taking any action to check the downtrend. In return, Trump won’t be taking any action against Saudi Arabia for the assassination of journalist Jamal Khashoggi.

Meanwhile, apart from oversupply concerns, weakening demand affected the oil market. Apprehensions about a slowdown in the China economy owing to the ongoing Sino-U.S. trade disputes increased expectations of a fall in oil demand. After all, China is the world’s largest importer of oil and thus the largest driver of crude oil prices.

Moreover, the recent strength in the U.S. dollar weighed on dollar-denominated prices of oil, added Phil Flynn, senior market analyst at Price Futures Group. Let us now take a look at the potential winners and losers as oil prices fall at a steady clip:

Falling Oil Prices Put Pressure on E&P Companies

Exploration and Production (E&P) companies have always been perturbed by the continuous inflow of cash. After all, such cash inflows are required to finance their investment programs. However, such concerns were in the backburner after crude price rose this year.

At the end of the third quarter, U.S. E&P companies were able to cover capital spending from operating cash flows. Most of the U.S. E&P bigwigs, in fact, on average posted cash flows that were higher than their capital spending in the third quarter for the first time since 2011, with Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) , the country’s largest oil groups registering healthy profits from U.S. operations.

 

But, the collapse in oil prices over the past two months has raised fresh concerns about the possibility of further infusions of cash, something that doesn’t bode well for E&P companies. Lest we forget, in the third quarter, WTI crude price averaged $73 a barrel, and now it’s trading just above $50 a barrel.

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 major part of the operating costs for aviation firms; thus rise in oil prices will hit profit margins.

Refineries also stand to gain from the decline in crude oil prices. Refineries buy crude oil as their raw material. So, refineries’ net cash flow increases when crude oil prices fall.

Given this bullishness, some of the top-ranked aviation and refinery stocks one could consider are Spirit Airlines, Inc. (SAVE - Free Report) , EnLink Midstream, LLC (ENLC - Free Report) and Phillips 66 (PSX - Free Report) .

Spirit Airlines provides low-fare airline services. The company currently has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings rose 9.4% in the last 60 days. The company’s expected earnings growth rate for the current year is 11.7% against the Transportation - Airline industry’s projected decline of 4.6%.

EnLink Midstream 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 (Buy). The Zacks Consensus Estimate for its current-year 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 estimated decline of 67.2%.

Phillips 66 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 its current-year earnings moved up 11.8% in the last 60 days.  The company’s expected earnings growth rate for the current year is 100.5% compared with the Oil and Gas - Refining and Marketing industry’s expected increase of 7.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Oil Price Drop to Benefit Emerging Markets

Steady drop in oil prices is also likely to benefit importers like Turkey, South Africa and India. Cheaper black gold will boost their balance of payments and support GDP growth. Capital Economics chipped in and said that with every $10 per barrel drop in the oil price, oil importing emerging economies’ income gain by 0.5-0.7% of GDP.

This, certainly, calls for investing in fundamentally sound companies from the aforesaid emerging economies. One of the best ranked stocks you may consider is Azure Power Global Limited (AZRE - Free Report) . The company that produces and develops solar energy carries a Zacks Rank #2, while it’s expected earnings growth rate for the next quarter is a whopping 1,500% compared with the Solar industry’s expected increase of 111%.

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