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Why the Qantas share price soared 6.5% higher today

The best performer on the S&P/ASX 200 index on Wednesday has been the Qantas Airways Limited (ASX: QAN) share price.

In morning trade the airline’s shares were soaring as much as 6.5% higher at $6.57.

They have since descended a touch but sit 4.5% higher at $6.45 at the time of writing.

Why is the Qantas share price soaring today?

The Qantas share price has come under significant selling pressure this week after oil prices surged higher following the drone attacks on key oil refineries in Saudi Arabia.

As fuel costs are the airline’s biggest expense by some distance, a sharp rise in oil prices can weigh heavily on margins.

The good news for Qantas is that oil prices came crashing back down to earth overnight after Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, advised that 50% of the crude production cut from the attack has been restored in the past two days.

According to CNBC, bin Salman said: “We are in the process to bring back oil refining to full capacity. The company will honor all of its commitments to its customers this month by drawing from its reserves of crude oil and further modified some of its oil until the production capacity of the country is up to 11 million barrels a day by the end of September and up to 12 million barrels in November.”

This appears to have eased concerns that oil prices were going to follow iron ore prices to multi-year highs on the back of supply constraints.

One broker that continues to see value in the shares of Qantas is Goldman Sachs. Earlier this week its analysts reiterated their conviction buy rating and $6.53 price target on the company’s shares.

The broker said: “We believe Qantas is one of the best placed global carriers to benefit from the recent volatility in global oil prices, given its: (i) fully hedged FY20 oil position, with downside participation; and (ii) strong track record of recovering fuel prices through effective capacity and price management.”

Adding that Qantas “has a good track record of this, in FY19 having recovered A$594mn of its A$614mn yoy rise in fuel expense for FY19 via higher passenger ticketing revenues – effectively delivering pricing power of 97% per dollar cost increase in fuel expense.”

I think Goldman is spot on and would also class Qantas’ shares as a buy ahead of the likes of Air New Zealand Limited (ASX: AIZ) and Virgin Australia Holdings Ltd (ASX: VAH).

And finally, also supporting its share price today has been a broker note out of Morgan Stanley. According to the note, it has upgraded Qantas’ shares to an overweight rating and lifted the price target on them to $7.00. 

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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