Rolls-Royce share price surged by 10% on Wednesday, reaching its highest point since March 12. It has soared by 16% from its lowest point this year.
The main reason for the ongoing rally is the ceasefire between the United States and Iran, which started today. This ceasefire has led to a significant plunge in crude oil prices, with Brent and the West Texas Intermediate (WTI) falling by over 10%.
This retreat will translate to lower jet fuel prices, which will benefit airlines. Most importantly, the ceasefire, if it holds, will lead to reduced tensions in the Middle East, where air traffic has stalled in the past few weeks.
The company will benefit from this because of its business model because it makes most of its money from long-term services contracts. It charges airlines per flying hours, which has reduced since the war started in February.
The most recent results showed that its business is doing well as the turnaround under Tufan Erginbilgic continues. These results showed that its annual revenue jumped to £20.05 billion last year from £17.8 billion a year earlier.
The company’s profit before tax rose to over £3.35 billion from £2.29 billion. Also, its free cash flow rose to £3.27 billion from £2.4 billion a year earlier. The management also boosted its guidance, with the operating profit soaring between £4.9 billion and £5.2 billion.
Rolls-Royce share price rebounded after forming a falling wedge
RR stock chart | Source: TradingView
The stock also rebounded after forming a falling wedge pattern, which is made up of two descending and converging trendlines.
Its upper side connected the highest swings since February 26, while the lower trendline connected the lowest swings since February 18. A falling wedge is one of the most common bullish reversal signs in technical analysis.
It has now moved above the 50-day Exponential Moving Average (EMA) and is about to flip the Supertrend indicator from red to green.
Therefore, the stock will likely continue rising in the coming weeks, potentially to the year-to-date high of $1,420, up by 12% above the current level. This rebound is in line with our recent RR stock forecast.
The biggest risk the stock faces is if the ceasefire fails to hold, which will lead to a prolonged war. One reason why the ceasefire may fail is that Israel’s goal is to extend it for longer and make it ungovernable.
Also, the differences between the US and Iran are still substantial. For example, Iran will always reject calls to end its ballistic missile program and funding its regional allies like Hamas and Hezbollah.
As such, a war may restart after the two-week break, which will impact the civil aviation industry.
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