Oil Prices Soar on Saudi Plant Attack: Winners & Losers
Oil prices are currently trading at their highest level since May, thanks to an attack on Saudi oil facility that led to a disruption in the global supply of crude. The coordinated drone strikes on key Saudi oil facilities have removed nearly 5% of global supplies, an attack that the United States blamed Iran for.
Needless to say, the affected location is the world’s largest oil procession plant. In fact, Saudi Energy Minister Prince Abdulaziz bin Salman said that almost 5.7 million barrels a day of crude oil and gas have been affected.
Brent crude futures at one point of time climbed almost 20% to take the global oil benchmark just shy of $72 a barrel. U.S. oil futures, by the way, were trading at more than $61 a barrel, highlighting a rise of nearly 10%.
Persistent attacks on Saudi’s oil infrastructure, which historically has been a steady source of crude, is a new pattern that the oil market has to deal with. Lest we forget, oil prices edged up for the week ending Aug 16 amid a weekend attack on a Saudi oilfield by Yemeni separatists.
Yemen's Houthi group had been responsible for a drone attack on an oilfield in eastern Saudi Arabia, resulting in a fire at a gas plant. Saudi oilfield attack has, thus, added to West Asian turmoil. Needless to say, oil prices rallied after such an attack raised concerns about supply disruption.
Oil Jump: A Boon for These Stocks
With state energy producer Saudi Aramco bearing the brunt of the attack, its rival oil producers mostly in China saw their shares climb north. China’s biggest offshore oil producer, CNOOC’s shares jumped 8.7% in Hong Kong, notching its best performance on the Hang Seng. Another Hang Seng component, PetroChina, Asia’s largest oil and gas producer, witnessed its shares soar 7.4%.
Most importantly, rise in oil prices is a blessing in disguise for companies involved in hydraulic fracturing. Such companies were affected the most at the end of last year due to a drop in oil prices. This is because when oil is cheap, the cost structure of such corporations loses appeal and the incentive to pump dies.
But now, with oil prices increasing, fracking-related service stocks, including U.S. Silica Holdings SLCA, are sure to make a comeback. The Zacks Rank #3 (Hold) company’s expected earnings growth rate for the next year is more than 100%, higher than the Mining - Miscellaneous industry’s projected rise of 10.2%.
Rise in oil prices of course bodes well for oil majors. Chevron Corporation CVX is specially positioned to benefit as this Zacks Rank #3 company has a stable cash position and balance sheet when compared to peers.
Moreover, it’s a dividend aristocrat as it has rewarded stockholders with a dividend hike over the past 25 years. Shares of Chevron, in the meantime, have advanced 11.7% on a year-to-date basis against the Oil and Gas - Integrated - International industry’s decline of 0.9%.
Gold prices are also expected to move north on higher oil prices. This is because as crude prices rise, prices of essential goods and commodities follow suit. And value of gold rises when inflation picks up. After all, it acts as a hedge against inflation. In fact, theoretically, more than 60% of the time gold and crude oil have a direct relationship. Given this bullishness, one should consider gold mining companies. Notable among them are AngloGold Ashanti Limited AU, Kinross Gold Corporation KGC and Barrick Gold Corporation GOLD.
AngloGold Ashanti operates as a gold mining company. The company has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings has moved up 20.5% over the past 60 days. The company’s expected earnings growth rate for the current year is 154.7% compared with the Mining - Gold industry’s estimated rally of 20.1%. The company has outdone the broader industry so far this year (+50.1% vs +36.3%).
Kinross Gold engages in the acquisition, exploration and development of gold properties in the United States. The stock currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 44.4% in the past 60 days. The company’s expected earnings growth rate for the current year is 155.7%. The company has outpaced the broader industry on a year-to-date basis (+45.6% vs +36.3%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Barrick Gold explores and develops mineral properties. The company primarily explores gold, copper, and silver deposits. The stock currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has risen 31.7% in the past 60 days. The company’s expected earnings growth rate for the current year is 53.9%. The company has outperformed the broader industry over the past year (+66.4% vs +59.9%).
Aviation, Refiners to Take a Hit
Aviation stocks traditionally have an inverse relationship with oil price. So, it isn’t surprising that shares of aviation firms will decline after a rise in crude oil prices. After all, fuel costs form major part of the operating costs of aviation firms.
Refineries also stand to lose from higher prices of crude oil, which is their raw material. Naturally, refineries’ net cash flow declines when crude oil prices rise. Especially in India, two of the country’s largest oil refiners Hindustan Petroleum and Bharat Petroleum have seen their shares fall. After all, these companies have signed a $44-billion deal with Saudi Aramco last year to build a mega-refinery in India.
Oil Price Rise to Affect Emerging Markets
Rise in oil prices is likely to hamper importers like Turkey, South Africa and India. Expensive black gold will affect their balance of payments and won’t 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. But with oil prices moving up in the current scenario, emerging economies won’t be expecting any income gains.
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