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Oil Prices Rise on Saudi Oilfield Attack: Winners & Losers

Tirthankar Chakraborty

The recent Organization of the Petroleum Exporting Countries’ (OPEC) report raising concerns about growth in oil demand should have hurt oil prices. For instance, OPEC trimmed global oil demand growth projection for this year by 40,000 barrels per day (bpd) to 1.10 million bpd.

However, despite the bearish view, oil prices moved north. The West Texas Intermediate (WTI) crude went up 0.7%, to $54.87 a barrel on Aug 16. And when it comes to Brent crude, the global oil benchmark increased 0.7% to $58.64.

So, what’s driving oil higher? Oil prices edged up for the week ending Aug 16 amid a weekend attack on a Saudi oilfield by Yemeni separatists and easing concerns about Sino-U.S. trade worries. Yemen's Houthi group has been recently 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.

White House economic adviser Larry Kudlow, in the meantime, said that officials from both the United States and China would interact within 10 days, and could make significant progress about ending trade disputes. By the way, Chinese official Yang Jiechi met U.S. Secretary of State Mike Pompeo in New York last week to discuss China-U.S. trade relations.

Increasing optimism in U.S.-China trade negotiations is likely to drive global growth. And more growth means more oil consumption. Lest we forget, these economies imposed billions of dollars of tariffs on each other’s goods over the past year, battering equity markets, souring business and consumer sentiments as well as hampering economic growth.

Concerns about economic recession were also weighing on crude prices for quite some time. But, strong consumer spending data has eased worries about an impending economic recession. Retail sales that measure outlays at stores, online-shopping websites and restaurants increased at a seasonally adjusted rate of 0.7% in July from June, easily topping projections, according to the Commerce Department. Retail sales reading, in fact, was the strongest since March. A healthy labor market and low unemployment rate are cited as reasons behind the uptick in retail sales (read more: 5 Best Stocks to Buy on Booming Retail Sales).

Oil Jump: A Boon for These Stocks

Corporations that are into hydraulic fracturing for oil 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 quarter is 50%, more than the Oil and Gas - Mining - Miscellaneous industry’s projected rise of nearly 35%.

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 6.5% on a year-to-date basis against the Oil and Gas - Integrated - International industry’s decline of 5.5%.

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 #2 (Buy). The Zacks Consensus Estimate for its current-year earnings has moved up 14.9% over the past 60 days. The company’s expected earnings growth rate for the current year is 118.9% compared with the Mining - Gold industry’s estimated rally of 14.9%. The company has outdone the broader industry over the past year (+186.3% vs +64.4%).

Kinross Gold engages in the acquisition, exploration and development of gold properties in the United States. The stock currently has a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for its current-year earnings has climbed more than 100% in the past 60 days. The company’s expected earnings growth rate for the current year is 150%. The company has outpaced the broader industry over the past year (+66.6% vs +64.4%). 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. The Zacks Consensus Estimate for its current-year earnings has soared 25.6% in the past 60 days. The company’s expected earnings growth rate for the current year is 40%. The company has outperformed the broader industry over the past one-year period (+81.4% vs +64.4%).

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 are 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.

Oil Price Rise to Affect Emerging Markets

Rise in oil prices is also 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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AngloGold Ashanti Limited (AU) : Free Stock Analysis Report
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
Barrick Gold Corporation (GOLD) : Free Stock Analysis Report
U.S. Silica Holdings, Inc. (SLCA) : Free Stock Analysis Report
Chevron Corporation (CVX) : Free Stock Analysis Report
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