U.S. oil price recently slipped into a bear market territory. The West Texas Intermediate (WTI) crude settled at $51.68 a barrel on Jun 5, which leaves crude down 22% from its Apr 23 closing high of $66.30. And we all know that entry into a bear market is mostly defined by a drop of more than 20% from the most recent high. Some market pundits, in fact, 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 let’s see what led to such steep declines. A combination of an uptick in U.S. inventories and trade war tensions are cited as the primary reasons behind the stupendous oil price slump. According to the U.S. Energy Information Administration (EIA), oil inventories in America soared 6.8 million barrels for the week ended May 31, the largest in five weeks.
What’s more, stockpiles barring those in the Strategic Petroleum Reserve are now at 483.3 million barrels, which is almost 6% above the five-year average during this time of the year, added the EIA. Marshall Steeves, energy market analyst, chipped in “the stock build was tremendous on its own and well exceeded expectations due to a steep increase in imports and a rise in production to a new weekly record high.” Additionally, the American Petroleum Institute said that U.S. crude supplies jumped by 3.6 million barrels for the week ended May 31.
Such serious evidences of a supply glut, at a time when trade war fears are denting demand for oil and other commodities, have dragged oil prices down. The U.S.-China trade tiff currently shows less chances of a near-term resolution. The trade tussle added to concerns about both global and U.S. economic growth. And such worries doubled after President Trump said that he would impose new tariffs on all products imported from Mexico. He categorically mentioned that such tariffs will stay in effect until the illegal immigration problem is sorted.
Oil Drop: A Bane for These Stocks
Companies that are involved in hydraulic fracturing of oil like PDC Energy Inc (PDCE - Free Report) and related service stocks like U.S. Silica Holdings (SLCA - Free Report) will get affected the most by the drop in oil prices. This is because when oil is cheap, their cost structure isn’t alluring and the incentive to pump dies out.
Exploration and Production (E&P) companies like Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) , the country’s largest oil groups, have always been bothered by the continuous inflow of cash. After all, such cash inflows are required to finance their investment programs. And now, such concerns have exaggerated after crude price fell into the bear market.
Which Are the Lucky Ones?
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 SkyWest, Inc. (SKYW - Free Report) , RGC Resources, Inc. (RGCO - Free Report) and NGL Energy Partners LP (NGL - Free Report) . All these stocks flaunt a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
SkyWest operates a regional airline in the United States. The Zacks Consensus Estimate for its current-year earnings has risen 4.1% in the last 60 days. The company, which is part of the Transportation - Airline industry, expects earnings to grow 11.2% and 14.9% in the current quarter and year, respectively.
RGC Resources operates as an energy services company. The Zacks Consensus Estimate for its current-year earnings has moved up 3.9% in the last 60 days. The company’s expected earnings growth rate for the current year is 11.6% against the Oil and Gas - Refining and Marketing industry’s projected decline of 7.1%.
NGL Energy’s refined products and renewables segment markets gasoline, diesel, ethanol, and biodiesel products. The Zacks Consensus Estimate for its current-year earnings has surged 78.3% in the last 60 days. The company, which is part of the Oil and Gas - Refining and Marketing - Master Limited Partnerships industry, expects earnings to grow a whopping 90% and 134.9% in the current and next quarter, respectively.
Emerging Markets to Gain From Oil Price Drop
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 had said that with every $10 per barrel drop in the oil price, oil importing emerging economies’ income gains by 0.5-0.7% of GDP. Thus, keeping an eye on fundamentally-sound companies from the emerging economies like Azure Power Global Limited (AZRE - Free Report) should prove wise.
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