The fuel-dependent airline industry suffered stock losses Monday, following reports of a drone attack on Saudi Arabian oil facilities.
The Saudi Arabian Oil Company (Saudi Aramco) noted over the weekend that its emergency crews had contained fires at its plants in Abqaiq and Khurais, spurring a nosedive in several European airline stocks, as well as a storm of social media responses from U.S. officials.
The Dhahran-headquartered oil giant said the blaze was due to projectile-spawned terrorist attacks, which resulted in the suspended production of 5.7 million barrels of crude oil per day.
(Click on image to enlarge)
According to recent figures from the U.S. Energy Information Administration (EIA), Saudi Arabia’s crude oil output averaged around 9.9 million barrels per day (b/d) in May 2019, which places its post-attack production level at about half-speed and cuts total global supply down by around 5%.
Ron Quigley, head of fixed income syndicate at Mischler Financial, recently noted that unlike in the U.S., where “hundreds of companies generate our daily production or in Russia where that number dwindles down to dozens of corporations, Saudi Arabian Oil Company produces all its oil itself.”
Quigley touted the company as “the single largest and most profitable” globally, and by “holding back on 3 or 4 million barrels a day, Saudi Arabia can single-handedly catapult global oil prices to four times their current value, thereby throwing the world into a global recession.”
Airlines Face A Bumpy Ride
Against this backdrop, higher fuel costs have added to the fire already harming much of Europe’s air transport business, which has been plagued by ongoing Brexit uncertainties, as well as intensified competition from low-cost carriers, among other headwinds.
Several airlines across the European continent Monday experienced a plunge in their American Depositary Share (ADS) prices, including: Germany’s Lufthansa (OTCMKTS: DLAKY), which fell more than 3.5%; Dutch aerospace and defense company Airbus Group (OTCMKTS: EADSY), which shed close to 4.0%; and International Consolidated Airlines Group (OTCMKTS: ICAGY), the UK-based owner of British Airways and Iberia, which plunged around 2.16%.
Lufthansa’s earnings capabilities will most likely be further challenged by the higher cost of fuel, as the company contends with fierce rivalry.
(Click on image to enlarge)
In the second quarter of 2019, Lufthansa CEO Ulrik Svensson said, for example, that the German airline’s earnings are “feeling the effects of tough competition in Europe and sizeable overcapacities,” especially on its short-haul routes.
In the first half of 2019, Lufthansa’s discount carrier Eurowings generated an adjusted EBIT of €‑273m, down from € ‑220m in the same year-ago period.
Moody’s Investors Service highlighted that Lufthansa’s profitability has deteriorated over the last six months, “mainly because of the yield pressure in the short-haul segment and higher fuel costs.”
Moody’s said it expects the company’s earnings to remain under pressure throughout H2 2019, such that its adjusted EBIT falls to just below €2bn, while its margins fall towards 5% — remaining lower than those of its airline industry peers.
Moreover, the ratings agency added that the restructuring and turnaround plan for Eurowings is likely to take time, at least through 2020-21, while Lufthansa continues to face industry headwinds, including higher fuel prices, currency volatility, air traffic industrial disputes and Brexit.
Lufthansa had warned in June that it expects to report a low single-digit percentage increase in total revenues and an adjusted EBIT margin of 5.5-6.5% for the full year 2019.
The company attributed its guidance to persistent overcapacities, aggressive competition, and increasingly price-sensitive demand, which continue to pressure yields on the European routes of Network Airlines and Eurowings.
The airline is now contending with a surge in oil prices, which will likely contribute to an even dimmer picture of H2 2019 and full-year results.
Oil Prices Gush
The current contract of West Texas Intermediate (WTI) was last trading over 11.4% at US$61.11 per barrel, closer to its 52-week peak of US$65.47 than to its low of US$44.93, according to the IBKR Trader Workstation. Earlier, Brent had reached around US$72 p/barrel, and WTI about US$64 p/barrel, before receding.
Many in the market suspect oil prices may surge higher in the near-term amid heightened regional volatility and potential U.S. involvement.
U.S. President Donald Trump tweeted Monday, for instance, that there “is a reason to believe that we know the culprit, are locked and loaded depending on verification but are waiting to hear from the Kingdom as to who they believe was the cause of the attack, and under what terms we would proceed!”
The President’s statement follows U.S. Secretary of State Mike Pompeo’s tweet over the weekend, which stated that amid “all the calls for de-escalation, Iran has now launched an unprecedented attack on the world’s energy supply.”
Many market participants chimed-in Monday with their views.
Analysts at Janney Montgomery, for example, observed that “the likelihood that this situation spawns aftershocks is high in our opinion.”
Others think that prices will revert back to, or exceed their recent highs, should tensions continue unabated.
Benzinga’s Jayson Derrick cited Tortoise Capital portfolio manager Rob Thummel in saying the commodity could move higher in the near-term by as much as 20%, and over the long-term, it could trade with an added $5 to $10 in risk premium until the likelihood of further attacks are reduced. Also, U.S. gas prices could rise by 25 cents at the pump.
The U.S. Oil Fund ETF (NYSEArca: USO) has already shot up by around 11.6% intraday Monday to US$12.77.
Derrick added that some countries will likely be more impacted than others, as more than half of all 8 million barrels of Saudi Arabian oil exports are destined to China, Japan, South Korea, and Taiwan.
Meanwhile, oil production in Saudi Arabia had already been at relatively depressed levels prior to the weekend bombing.
The country’s output had dropped following a December 2018 agreement by members of the Organization of the Petroleum Exporting Countries (OPEC) to cut crude oil supply, leaving its May level near a four-year low and more than 1 million b/d lower than its all-time high in November 2018.
The EIA noted that Saudi Arabia’s crude oil exports, especially to the U.S., have also fallen amid a rise in the latter’s domestic production, as well as its increased imports from other countries such as Canada. However, some nations—in particular, China—have expanded their oil imports from the Kingdom.
After visiting the sites impacted by the attacks, Saudi Aramco CEO Amin Nasser said he was “gratified that there were no injuries” and that work was underway “to restore production.”
In the meantime, fuel-dependent industries such as airlines will likely face continued volatility, should oil prices continue to climb higher.
Comments
Log in or sign up to join the conversation.