The decision of the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – to not curb the output of crude, which was announced at its meeting in the Austrian capital of Vienna on Friday, Dec 4, turned out to be a boon for stocks in the airline space.
The gathering of the group’s 12 member countries from the Middle East, Africa and Latin America decided that the daily crude production would be approximately 31.5 million barrels (the previous production cap was officially 30 million barrels). The cartel’s move defied expectations of an output cut in response to the prevailing supply glut.
Airlines Soar on OPEC Decision
The group’s ruling resulted in major airline players like Alaska Air Group, Inc. (ALK – Analyst Report), United Continental (UAL – Analyst Report), Southwest Airlines (LUV – Analyst Report) American Airlines Group (AAL – Analyst Report) and Delta Air Lines (DAL – Analyst Report) gaining significantly. Consequently, it was no surprise that the NYSE ARCA Airline index gained 2% to close at $92.75 on Dec 4 over the preceding day’s figure.
In fact, the concern of oversupply is nothing new and has been responsible for the massive fall in oil prices. Currently, oil prices are hovering around the $40 per barrel mark. This represents a significant decline from the approximate $105 per barrel that oil traded in July, last year.
The drop in oil prices has reduced the airline companies’ operating expenses significantly, thereby aiding the bottom line. OPEC’s decision not to curb output despite the slump in prices means that the oversupply will continue to haunt the energy space. This implies good times ahead for airline carriers.
Given this backdrop, it is no surprise that the OPEC oil cartel’s refusal to cut output and let the commodity slide has positively impacted the airline space.
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