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This article is from FSM.
High Oil Prices and Its Impact on Investments
On 19 October 2007, the Nymex Light Crude prices rose to an intraday high of US$90 per barrel for the first time in history. The day also marked the 20th anniversary of the 'Black Monday' crash 20 years ago ― the largest one-day decline in the stock market history, where the Dow Jones Industrial Average fell by 22.6%, in USD terms. Perhaps, the investors were spooked by the memory of that eventful day, or alarmed by the fact that oil prices have broken the US$90 barrier; on the same day, the DJIA fell by 367 points or 2.6%. The S&P 500 also declined by 2.6% and the NASDAQ by 2.7% (all figures in USD terms).
However, in inflation-adjusted terms, the price of oil is still below its record peak hit in the early 1980's during the Iran-Iraq war. We have identified three short-term factors for this sudden spike in oil prices.
The Sudden Spike In Oil Prices
Firstly, the weak US Dollar has sunk to new lows against the Euro after breaching the 1.43 level. Since the rate cuts by the Federal Reserve on 18 September 2007, it has lost about 2.3% against the Euro and 8.4% year-to-date (as at 23 October 2007).
When the dollar is so weak, countries in the OPEC bloc may have priced oil higher in dollar terms to compensate them for the loss in the value of the dollar. A low dollar value depresses the purchasing power of the barrels of oil, once the sale of oil is converted into different currencies to pay for their respective imports.
Secondly, geopolitical factors may have been another reason for oil prices to increase. Tensions between Turkey and Kurdish rebels in northern Iraq, a net oil-exporting country, have created fears that supplies may be disrupted should the situation deteriorate. Research has shown that oil prices have a positive correlation with geopolitical factors. The oil embargo by the Arabian nations in the early 1970s caused oil prices to increase by about 400% back then. We have seen the same scenario of rising oil prices during periods of increased geopolitical risk play-out in the Iran-Iraq war in the early 1980s, the Gulf War in the mid-90's and after the 9/11 attacks.
Thirdly, there has been speculation over oil prices in the financial markets. As oil prices have increased by about 28% since late August till mid-October, traders who had short positions on oil have been forced to scramble to reduce their losses, driving prices higher. New speculators betting on further dollar weakness, and thus expecting oil prices to be driven higher, may have contributed to this spike in oil prices.
Ultimately, oil as a commodity is subject to the forces of supply and demand. The confluence of factors as we approach the winter season in the Northern Hemisphere as well as worries over supplies may create a situation where oil prices remain persistently high in the short term, although prices have come off the psychological US$90 mark on profit-taking. At the time of writing, oil last traded at US$85.90 as at 23 October 2007.
What Do Persistently High Oil Prices Mean For Investors?
From Chart 2, we can see that the forecast global oil consumption is likely to increase by a further 50% in the next 23 years. Since oil consumption is on a visible uptrend and is seemingly growing at a much faster rate than oil supply, we think that oil prices will remain high in the long run. So, what do high oil prices mean for investors?
Firstly, there will be an effect on consumers. In a world that is currently addicted to oil, with the US being the biggest oil consumer at 20.7 million barrels per day (source: CIA Factbook, 2004), the effect of the rising cost of living from food, to clothing and transport will have an impact on the typical consumer.
A decrease in consumer confidence is likely, and with the increase in prices, spending will likely decline. This will have an impact on the earnings of companies in the medium term and share prices will tend to reflect the lower earnings growth potential of companies.
Secondly, we think that energy- and oil-related investments will continue to do well. Companies that are involved directly or indirectly in the upstream portion like exploration, extraction and shipping of oil should continue to make strong profits. Downstream-related businesses involved in activities such as the refining of oil will also be able to enjoy increased margins.
Investing into commodities should also continue to garner interest. In an inflationary environment, commodities tend to give the best returns, while fixed income investments fare the worst. Whether investing in soft commodities which are planted, like wheat or corn, or hard commodities which are mined, like nickel and copper, the commodity basket as a whole will tend to rise in tandem with its cost of production. Precious metals will also increase in price as a hedge against inflation. We have already seen prices of gold and platinum increase sharply in recent times.
In the medium-to-long term, investments in alternative energies may also prove to be a positive bet. Continued high oil prices will create opportunities for the development of 'substitutes'. In economics terms, a substitute good refers to a good which can replace another and governments are likely to spearhead initiatives to support the development of substitutes to reduce their dependence on oil. Investing in these companies or technologies may have great earnings growth potential.
Unattractive Investments When High Oil Prices Prevail
The risks will increase for various types of investments, including companies which are involved in the logistics or transportation businesses. Airline companies typically have to hedge their fuel costs by entering into forward contracts so as to provide estimates for their operational costs. However, with rising fuel prices, profits are expected to be hit even harder as fuel surcharges imposed on customers or hedging activities cannot completely mitigate the high costs of fuel. For instance, FedEx, a courier company, burned over US$3.5 billion worth of fuel in the course of its operations last year and it is expected that this figure will continue to rise.
Secondly, companies which are heavily involved in manufacturing would also be affected by higher oil prices. High oil prices will squeeze the margins of manufacturing companies as operational costs increase. Companies which are involved in using oil as raw materials to manufacture goods, such as plastics manufacturers, will be hit by a double whammy of higher operational costs as well as high raw material prices.
Thirdly, fixed income investments may not be as attractive. As mentioned previously, persistently high oil prices will lead to continued inflation in the economy. Inflation is the enemy of fixed income investments, as the yields from these investments may not be able to keep pace with the loss in purchasing power. In Singapore, where the recently reported inflation figure in September 2007 showed a year-on-year increase of 2.7%, fixed deposits that return 1.5% or less are actually loss-making in real terms.
We can expect a continued deterioration in the prices of bonds as investors shift their money to assets which act as a hedge against inflation, such as the precious metals, or into riskier assets which can offer positive rates of return after adjusting for inflation.
Cheap Oil No More
The era of cheap oil appears to be over. We can see from the WTI options market that virtually no institution or trader has positions on oil to be at US$30/barrel by December 2008. To put this in perspective, US$30 was the price of oil at the turn of the millennium in 2000, just 7 years ago.
However, this spike in prices does appear to be more financially driven, rather than fundamentally driven, and investors should not start reacting by selling off their investments in fear that economies will come to a standstill in the event that oil prices run up even higher.
Unless there is a concerted shift to reduce the dependence on oil, prices in the long run only look likely to be headed one way ? up. Oil consumption is forecast to increase at a steady pace all the way till 2030. There is an immense need for oil with the emergence of China and India as their huge populations and economies expand to become more significant members of the global economy. Consequently, their demands for energy are likely to push the general demand up for oil even further. Oil is also becoming more difficult to find and oil companies are increasingly having to drill in deeper and at more dangerous locations as existing oil wells start to dry up.
so who is donating arrow today? hahaha....cheers... *wink*
Hi Great grand master... This time round, you are here to collect or shoot 100000 arrows in 3 days?
anyway if you drive pass kisok today...you will probably notice.."the lion head is pointing down"
then you better hurry to your beloved bank and check you bank account carefully.
hohoho...cheers.....
yes888, the DBS report is the latest. You got the tp of $6.85 correct in the 2nd line.
"Although SPC's earnings from E&P (exploration and production) will benefit from high crude oil prices, consolidated earnings would continue to be dominated by refining, and refining margins may not move in tandem with the direction of high oil prices," said DBS Vickers in a client note.
SPC's Q3 net profit more than quadrupled yoy to $99.85 million, despite Jul-Sep sales revenue remaining at a comparable $2.24 billion. This translates to 3Q EPS of 19.5 cents, up from 4.47 cents. The difference was that a year ago, crude oil prices fell by around US$20 a barrel to US$60 during Q3, resulting in lower net profits at SPC, which made a $71 million provision for an inventory write-down to reflect the fall in crude price. This compares with today - following the recent price run-up when crude flirted with US$90 last week - when crude oil is around US$85 a barrel.
SPC said that in Q3, it also saw reduced demand for oil products - it sold less and imported fewer Middle East fuel oil cargoes for instance - with total salesvolume falling 4 per cent to 19.3 million barrels. This compared with strong demand inQ2, when regional refining capacity was hit by maintenance work and unplanned outages.
In Q3, most refineries came back on-stream and ran at high rates, as a result of which margins declined. SPC said it achieved an average refining margin of US$5 a barrel in Jul-Sep, down from US$9 a barrel in Q2, and US$7 in Q1. SPC said despite the reduced sales volume and weakening greenback, it managed to achieve a higher average realisation of US$76.02 per barrel in Q3, compared with US$70.32 in the corresponding period a year ago. This resulted in equivalent sales revenue for Q3.
Sorry. Next year is $0.01 for every steps, NOT $0.10.
Breakdown as following:
| Share Price (S$) |
New Minimum Bid Size (S$) |
| Up to $0.995 |
0.005 |
| $1.00 to $9.99 |
0.010 |
| >$10.00 |
0.020 |
Well, the largest economy is US and they are using US$.
They are also one of the largest consumption of the crude oil. This will drive their price up.
If you had saw from the newspapaer yesterday, the mid-earners are also trying to make their end meet now.
The level for inflation is never seen since their last recession when dotcom bubble bursted.
Although we can say that "this time is different" because Asia is very much independent now.
However, Asia is still not decoupled from them yet because they are the largest importer of goods manufactured in Asia.
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SPC had fallen below 5 days support.
Next level of support at $8.30.
If that support is breached too, it will fall below $8.
Both RSI and MACD is showing the trend of decline where RSI is still in over-bought region. |
anywhere i sold my at 8.20..break my resistance level... :)
i listen to the Master also...cheers
Its still $0.10 as of now as far as I know. : )
hmm...ask everyone a simple qn...we know US$ is dropping in value against most if not ALL currencies...and Crude Oil are quoted in US$...so tell me..is it reasonable to say that OF COURSE CRUDE OIL in US$ will go up lah....assumming every other else are constant...correct or not? so what's the BIG hu-ha about CrudeOil going up?!??!??! :PP
Kilroy, I know next year we can queue in $0.10. But now? The system can accept?
Its ok, maybe I had asked a stupid question.
I think yes888 is just trying to make his voice heard.
DBS Vickers - Singapore Petroleum
No longer cheap compared to regional peers Fully Valued S$8.80 (Downgrade from Hold) Price Target : 12-month S$ 6.85
Story: 3Q07 earnings came in slightly above expectations, with net profit jumping 330% y-o-y to $99.8m. The jump was exaggerated owing to inventory write-down of $71m in 3Q06. Refining margins declined, though, to US$5/bbl from US$9/bbl in 2Q07.
Point: We expect the benchmark Reuters Singapore complex refining margin to remain moderate at US$5-7/bbl in 4Q07 and average US$7.3/bbl and US$6.8/bbl for 2007 and 2008, respectively. 4Q07 earnings should exhibit strong y-o-y growth due to the exceptionally weak refining margins last year, but q-o-q should be weaker or flat. FY07F net profit should surge 56%, fueled mainly by strong improvement in refining margin. FY08 net profit should grow just modestly 7% driven by E&P growth.
Relevance: After the recent strong rally, although SPCs valuations may still appear inexpensive relative to domestic stocks, the counter is no longer cheap compared to regional refinery peers. With just moderate growth in FY08 from E&P compared to major refining capacity expansions at some peers, it is unlikely that SPC share price will continue to outperform.
With the current share price being significantly above our sum-of-parts target price of S$5.85, we downgrade SPC rating to Fully Valued (from Hold).
power, they shall have put 5.85...cheers..
How old was this report btw?...hmm... *wink*
Pinnacle,
Its possible when the new trading bid/spread system starts ... NEXT YEAR.
Dont be silly yes888. : )
You will NEVER know if you are the first one in the queue also I dont see the rationale in wanting to be the first in the queue *wink*
Time to ask DBS how the deduced the 6.xxSGD...
I know you can queue first.
But I thought you can only queue at $7.75, $7.80, $7.85... in multiple of $0.05.
Can queue in between?
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How to queue at $6.88 or $7.88 where the price jump is in $0.05 after $5.00? |
I queue first ma...I know i will get it one day...I will be the first one in the queue ;P
I am a typical Singaporean. cheers.............
How to queue at $6.88 or $7.88 where the price jump is in $0.05 after $5.00?
Crude oil prices have been at all-time records this month and markets seem to be convincing themselves that the once-unimaginable level of $100 per barrel may soon be achieved.
The effect of oil prices in the 1970s is notorious. They twice led to severe recessions in the developed world and equity bear markets. Why has nothing similar happened yet in the current surge in oil prices?
New research by Veronique Riches-Flores of Société Générale suggests the market has not been foolish in shrugging off higher prices so far. But it also suggests much more appreciation in oil prices would be hard to bear. She uses the concept of the ?oil burden? ? the volume of oil consumed multiplied by the average price and divided by nominal gross domestic product. This gives the proportion of the world economy devoted to buying oil.
On this analysis, oil was very cheap in the late 1990s and in this decade before the invasion of Iraq triggered the long-term rise in crude prices. With the world economy growing steadily, the oil burden at the end of the second quarter of this year was well below the level it touched in the middle of last year (when high oil prices did appear to weigh on the stock market). It was no higher than the levels seen in 2005. So this is the ?barrel half-full? argument: oil price inflation has not outstripped economic growth.
Ms Riches-Flores does have a ?barrel half-empty? argument, however. If prices are sustained at around their current levels, or even move forward to $100, then, she says, the most recent trends in crude oil prices might be more difficult to absorb.
With the reference price for the Organisation of the Petroleum Exporting Countries at $81, it is 45 per cent higher than a year ago. At the end of the second quarter, worldwide nominal GDP had risen only 13 per cent. That puts the ?oil burden? on a path to its highest level in more than a decade.
Copyright The Financial Times Limited 2007
Praying hard...first level queue @ 6.88 before 3
if not try luck @ 7.88 after 3...
cheers...
wah...good day for Nick, going big time!...now I withdarw all my que, waiting for the dust to settle...scarry man!
