Decline in oil prices to weigh on Singapore stocks

Oil prices have been pushed to four-year lows, driven by concerns that supply has been outpacing demand and a softening outlook over the global economy, particularly in Europe and China.

Crude oil processor
Source: Bloomberg

Since its peak back in June this year, at US$103.85 per barrel, WTI oil price dropped by nearly 20 percent to hover around the US$80 level in mid-October.

The falling prices are in line with the demand outlook, which has been getting gloomier in recent weeks.

It also has not helped that both the International Monetary Fund and World Bank cut their global growth outlooks in early October.

Some pressure also came from the supply side. Oil-producing countries such as Saudi Arabia, Iran and Kuwait have indicated they will not be cutting production to support prices, but are still keen to maintain their market share.

If oil prices remain low for a longer period, global cyclical stocks will likely be hit. In turn, this means that Singapore’s stock market would likely suffer the most in the region due to the country’s relatively high exposure to global cyclical stocks. For example, MSCI Singapore dominates a 41 percent weight of global cyclical, compared with 27 percent for Thailand and 8 percent for Indonesia.

Investor sentiment in the offshore and marine sector will be weighed down by low oil prices as this typically makes it less profitable for production and exploration work. The industry is already facing a number of other obstacles, such as a supply overhang of rigs which will persist at least for the next two years.

US Light Crude oil chart
Click to enlarge

Sembcorp Marine under pressure

One of the stocks that was punished in recent weeks by investors was the Singapore-listed Sembcorp Marine (SMM).

The company builds, owns, repairs and converts ships. It also has subsidiaries that provide equipment rental, cleaning and maintenance services.

Since the start of July till mid-October, WTI oil prices have dipped over 20 percent. Within the same period, SMM’s stock price has fallen nearly 10 percent on the bleaker outlook over black gold. 

With falling oil prices making production less profitable, there are higher concerns that oil explorers could cut back spending, which will affect SMM’s shipyard business. Any further decline in oil prices would likely weigh on SMM.

COSCO weighed down

Another counter that has also been weighed down by oil pressures, though to a lesser extent is COSCO Corporation (S). The company owns and operates vessels, builds rigs and provides marine engineering services.

Since July till mid-October, the stock has lost over 18 percent amid concerns that customer orders would be deferred on softening global outlooks.

One contract involved Sevan Drilling, which pushed back the delivery of a drilling unit by up to three years. The delivery was supposed to take place in the second quarter of this year, but the new agreement now leaves the option open for the contract to ultimately be terminated if not exercised.

No upside on the horizon for airlines

The drop in fuel prices should be good news for airline stocks, but it looks like they are still facing strong headwinds. Investor concerns appear to be driven largely by longer-term overcapacity concerns, intense competition and tight margins.

From July to mid-October, the Bloomberg World Airlines Index is down by 2.7 percent. Zooming into the Singapore-listed airlines, the picture looks worse. For example, Singapore Airlines has drifted lower by over 6 percent, while Tiger Airways Holdings has plunged 41.3 percent during the same period.

The US$80 per barrel level will be closely watched as it is widely believed to be the breakeven point for oil fields and rigs to operate profitably. If prices fall below this territory, we could see this spur a deeper selloff in global cyclical stocks.

 

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