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Cruise Stocks in Choppy Waters After Crude Oil Price Rise?

Harendra Ray

Crude oil prices surged the most in almost 30 years on Monday after a drone attack on Saudi Aramco's Abqaig oil processing plant. This attack has also heightened geopolitical tensions in the Middle East. The drone strikes on Saudi Aramco's Abqaig oil processing plant will hurt the output by nearly 5.7 million barrels per day (bpd), which is equivalent to more than 5% of global crude supply.

Following the attack, crude prices increased as much as 20% on Monday, before closing nearly 15% higher.

Cruise Stocks Take a Hit

Following the news, shares of major cruise operators like Norwegian Cruise Line Holdings Ltd. NCLH, Carnival Corporation & Plc CCL and Royal Caribbean Cruises Ltd. RCL declined 2.5%, 3.2% and 0.8% on Sep 16, respectively. Moreover, in the past three months, the industry has declined 6.8% against the S&P 500’s rally of 2.5%.

It is a well-documented fact that increase in oil prices hurts cruise stocks as both are inversely proportional to each other. This is because fuel costs are one of the most significant expenses of cruise companies. Thus, an increase in fuel prices is likely to prove detrimental for earnings growth of industry players.

Most of the cruise operators have been bearing the brunt of high expenses for quite some time now. The recent increase in oil prices will further elevate expenses. Analysts believe that the sudden spike in oil prices will hurt most of the cruise companies’ earnings in 2019.

The sharp increase has put further pressure on cruise operators, which were already suffering due to Trump administration's policy change on travel to Cuba. The ban on travel to Cuba at the beginning of the summer vacation is expected to have adversely impacted demand, which is usually high during the period. Royal Caribbean estimates the ban to reduce 2019 earnings in the range of 25 cents to 35 cents per share. It will impact Carnival’s earnings by 4-6 cents in fiscal 2019. Given the ban, Norwegian Cruise is slightly apprehensive of its overall performance in 2019. Resultantly, it expects adjusted earnings per share to be $5.00-$5.10, down from $5.40-$5.50 guided earlier.

Bottom Line

We believe oil prices will continue to be volatile due to heightening geopolitical tensions in the Middle East. Global head of market insight at S&P Global Platts, Sarah Cottle, said that if the conditions remain the same in Saudi Arabia for a longer period of time than oil prices could cost more than $80 a barrel. In a bid to counter the challenges posed by surging oil prices, cruise operators might increase ticket prices to shield profits.

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