Why Carnival Corporation Stock Sank Today
Key Points
Conflict in the Middle East is driving oil prices higher.
It's also disrupting travel patterns for passengers booked on cruises.
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Carnival Corporation (NYSE: CCL) (NYSE: CUK) stock tumbled 10.7% through 9:55 a.m. ET Monday after war broke out in the Persian Gulf over the weekend.
There are at least two reasons why.
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Closing the Strait of Hormuz
The first reason is that Iran responded to attacks by Israel and the United States by announcing it will "close" the Strait of Hormuz, the waterway between the United Arab Emirates and Iran, through which one-fifth of global oil supplies travel by ship.
Although some traffic is still moving through the Strait, the passage has become perilous, and insurance rates on oil tankers are rising as much as 50%. Combined with near-term pressure on oil supplies (Oilprice.com reports Hormuz traffic is down 70%), this is pushing up the cost of oil that cruise ships burn for fuel.
WTI crude futures are up 6.6% today at $71.42 per barrel, while Brent crude is rising 7.8% to $78.58. Reports from JPMorgan predict prices could hit $120 per barrel, roughly double what oil cost Friday.
Travel disrupted
The second reason cruise stocks are suffering is a disruption in travel plans, as Middle East travel becomes more hazardous. This affects not just cruise companies' ports of call, but also air flights that get passengers to and from their cruise ships.
Airlines are understandably nervous about flying into a combat zone, and are canceling flights throughout the Mideast. Key airports in Dubai, Abu Dhabi, and Doha are closed or nearly so, and "tens of thousands" of passengers who had planned connecting flights in the region are stranded around the world.
What it means for Carnival
I suspect investors are overreacting today. Although the company is likely to lose revenue short term, things will turn around for Carnival eventually. A 10% sell-off today seems extreme.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
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