HH Higher Oil Price: Winners And Losers

Oil price has zoomed to the highest levels in more than three and a half years buoyed by potential export disruptions in Iran and falling production in Venezuela. Additionally, the historic output cut deal by OPEC, Russia and other producers to curb production is paying off, paving the way for a rebalancing of the oil market despite rising U.S. production.

The global benchmark Brent crude and U.S. West Texas Intermediate (WTI - Free Report) rallied above $77 and $71 per barrel, respectively. The bullish trend is likely to continue given that Trump has decided to restore sanctions on Iran, which will disrupt oil supplies in the major Middle East oil producer Iran, resulting in further tightening of the global glut.

Additionally, seasonality will continue to support a price surge in the coming months. This is because demand generally picks up in a summer driving season (which starts with Memorial Day at the end of May and lasts until Labor Day in September), leading to higher prices.

A Blessing

Higher oil price is big boon to energy stocks, especially producers and explorers, which get most of their revenues from selling the crude that they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps on rising when oil price surges even higher, leading to fat profit margins and thus a spike in company’s share price.

As a result, the S&P Energy Index has gained 13.6% so far this quarter, easily outperforming the other sector. The Zacks Oil and Energy sector has gained 11% over the past month with some of the outperforming stocks including EP Energy Corporation EPEPioneer Energy Services Corp. (PES - Free Report) , Rex Energy Corporation (REXX - Free Report) , Transglobe Energy Corp (TGA - Free Report) , Penn Virginia Corporation PVAC, and W&T Offshore, Inc. (WTI - Free Report) . All these have soared more than 50% in a month.

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Gary Anderson 4 months ago Contributor's comment

Most of the tax cuts are going toward stock buy backs and management salaries. So oil rise will just be a tax for most people, being offset by nothing positive.

Moon Kil Woong 5 months ago Contributor's comment

Given if oil prices stayed at their low the US economy would be doing badly because banks would be wallowing in losses from bankrupt oil companies and oil equipment companies, this is a turn for the better. Although consumers will pay for more at the station, the money isn't lost in the economy, just moved around. What the tax cut finances is making it easier for the Federal Reserve to cut some QE off its books. And even that may not stay as a drain on the economy long, because 'm sure it will be reused again the second the next recession hits or the Treasury finds it hard to fill its Treasury Bond auctions.