MW: Oil-price rise may prompt Australian profit blow
By Virginia Harrison, MarketWatch
SYDNEY (MarketWatch) — Surging oil price have thrown a cloud over the earnings of many Australian companies, and some strategists argue that the pace of oil’s rise over the next year could guide possible profit impacts for certain sectors.
Goldman Sachs views the oil price as a potentially major risk to macro-economic views, in particular for the U.S. recovery and Australian consumption themes.
The strategists say the risk to equity markets is bedded in not just how far prices rise, but how quickly the rate of change occurs.
“History suggests that it is the rate of change in the oil price rather than the absolute level that we need to focus on with respect to earnings risk,” Goldman Sachs said in a research note.
“An 80% or greater increase in the oil price within a 12-month period results in a negative impact on equity markets within the subsequent one or two years,” the strategists said.
Sectors at threat include aviation, building materials, food and beverage, contracting and services, according to the Goldman analysts.
Benchmark Nymex crude futures have risen by nearly 19% this year, according to data from FactSet, as prolonged geopolitical conflicts in North Africa and the Middle East rattle supply fears and drive up prices.
Crude oil for May delivery (CLK11 108.36, -0.47, -0.43%) sat just below $109 a barrel during Asian trading hours Thursday.
Goldman Sachs said a rise in world oil prices in excess of $140 a barrel before September would prompt a review of portfolio strategies.
“The average oil price in Australian dollar terms in 2011 is running only around 3% above 2010, [but] oil price moves since the beginning of 2011 have clearly been more significant, thereby increasing the earnings risk during the second-half of 2011 and 2012,” the strategists said.
Airline-fuel fears
The aviation sector is the once of the most sensitive to oil-price fluctuations.
Major Australian carrier Qantas Ltd. (AU:QAN 2.20, -0.04, -1.79%) (QUBSF 2.34, +0.08, +3.54%) has suffered multiple earnings blows in recent months including due to the impact of soaring fuel-prices.
The company’s Chief Executive Alan Joyce said late last month that the “significant and sustained increases in the price of fuel is the most serious challenge Qantas has faced since the global financial crisis.”
In March, the airline announced a raft of cost-cutting measures, including reducing capacity, retiring some aircraft and levying fresh surcharges, partly in response to rising oil.
