With easyJet shares having had a volatile past couple of weeks due to geopolitical tensions, it’s worth assessing whether the stock is still worth buying.
easyJet shares (LON:EZJ) have had a turbulent past couple of weeks due to the conflict in the Middle East. Given the geopolitical instability in the region, it’s worth assessing whether the stock is still worth buying.A Sticky Relationship
One can be forgiven for thinking of easyJet as an inverted oil stock since April, given how it’s been trading like one. Its share price has had an inverse relationship with oil prices, and it’s understandable considering fuel takes up 29.9% of easyJet’s headline airline EBITDA costs. As such, its cost base could skyrocket if oil prices spike. This can lead to margin contraction and lower earnings, which the market seems to be wary of.
That said, speculative calls made by big banks such as JP Morgan about oil climbing to $130/bbl haven’t come to fruition, and are unlikely to, in my opinion. I hold this view for two reasons – economic upheaval, and a ceasefire having been reached between Israel and Iran. In fact, since the US executed Operation Midnight Hammer on Iran’s nuclear facilities, oil prices have slid down to their pre-attack levels of around $68/bbl.
More specifically, despite the Iranian parliament’s vote to close the Strait of Hormuz – where about 20.0% of the globe’s oil supply flows through – its national security council has yet to sign off on it. 90.0% of Iran’s oil exports pass through the strait, and accounts for 76.5% of government revenue. Closing the strait would mean Iran facing a catastrophic economic collapse, which would severely undermine the regime’s stability.
Plus, Iran’s previous attempt to close the strait in the 1980s wasn’t a success, either, as the US Navy intervened then to protect shipping lanes. Not to mention, most of the strait’s oil exports go to many of Iran’s ‘allies’ such as China, while the US and Europe get most of their oil from other regions. China in particular, wouldn’t be too pleased with a disruption, given that almost half of its oil imports stem from the strait itself.
But even in the event of higher oil prices, it’s worth highlighting that easyJet remains well positioned to overcome any short-term spikes thanks to its well-hedged oil contracts.
