European oil and basic resources stocks gained after U.S. President Donald Trump announced the country’s withdrawal from the 2015 accord to curb Iran’s nuclear program and reinstatement of sanctions. The subsequent surge in oil prices prompted investors to dump travel and leisure stocks, put off by the prospect of rising fuel costs for airlines.
Oil rose to a three-year high after the U.S. told buyers of Iranian crude they have six months to curb their purchases or face tough penalties. The dollar rallied for a fourth day. The events sent the Stoxx Europe 600 Oil & Gas Index up as much as 2 percent, making it the best-performing sector on the Stoxx Europe 600 Index, followed by the Basic Resources gauge, which rose as much as 1.6 percent. Travel and leisure stocks brought up the rear, dropping as much as 2.1 percent.
Exploration companies led the field, with Tullow Oil Plc and Aker BP ASA the biggest gainers. Among basic resources stocks, Voestalpine AG, BHP Billiton Plc and Tenaris SA outperformed. Ryanair Holdings Plc, Air France KLM, EasyJet Plc and TUI AG were among the biggest losers.
“Most energy companies have budgeted for mid-$50s oil prices in 2018, with this conservative outlook reflected in share prices today,” said Richard Turnill, Global Chief Investment Strategist at BlackRock Inc., in a note to clients. “This points to valuation upside should current levels of oil prices be sustained. In energy equities, we like exploration and production firms and midstream companies.”
For investors seeking exposure to oil, the case for investing in energy equities over crude itself or energy-related debt is stronger, he said. “Oil prices have run well ahead of energy stocks this year but this trend has started to turn,” Turnill wrote.
Here is a summary of more analyst comments on the sectors:
Natixis equity strategists Sylvain Goyon and Thomas Zlowodzki, in note:
- “Potential losers from this decision are clearly located in Europe,” with exposure in aerospace, automotive and oil. While U.S. sanctions should be positive in theory for Airbus and subcontractors, Airbus needs U.S. export licenses to sell to Iran as aircraft carry over 10 percent U.S. content; engine players such as Rolls-Royce are also affected
- Renault and Peugeot, historic players on the Iranian car market, are “in the front line”; also note major presence for Total, the most exposed group in Natixis sample
UBS Global Wealth Management’s Chief Investment Officer Mark Haefele, in note:
- “The decision is likely to curb global oil supplies and put upward pressure on oil prices” and, as a result, expects Trump’s move to push Brent higher and lead to increased volatility in coming months. “Overall, we believe that equity markets can withstand modestly higher oil prices. A boost to oil firms, which account for 7% of the MSCI All Country Index, should help offset the downside for other companies from higher input costs and the negative effects on consumer disposable incomes from higher fuel bills”
Bernstein analysts led by Douglas S. Harned in note:
- Don’t expect material impact to commercial aircraft companies from the sanctions and anticipate a “minor negative” for Boeing and Airbus as demand from Iran is a small percentage of their backlogs; for defense companies with exposure to Middle East markets, heightened tensions in the region likely to be a positive, driving increased demand for missile defense systems, in particular, but potentially also aircraft, ships, missiles, and vehicles
Stifel analysts Chris Wheaton and Robin Haworth, in note:
- Short-term disruption in oil market is unlikely; notes run-up in oil price into the “well-flagged news” that Trump would abandon the Iran nuclear deal has already priced in much of the short-term uncertainty; views announcement as adding to post-2020 oil market risks rather than the 2018 supply/demand balance: watch the longer-dated end of the oil futures curve, not the spot oil price
Kepler Cheuvreux Head of Oil & Gas research Bertrand Hodee, in note:
- “It remains unclear how Iranian exports will be affected, but there will an impact,” which Kepler estimates in a range of 0.2mb/day up to 1mb/day; “U.S. sanctions on Iran may put the market into a large deficit in 2019, though it will depend on how the Trump administration enforces the sanctions vis-a-vis importing countries”
- Notes Total is the most exposed “but no big deal”