Singapore O&G stocks up after Opec+ cut, but economists warn of higher oil prices adding to inflationary pressures

HIGHER oil prices on the back of a fall in oil production appear to have boosted the prices of several oil and gas (O&G) counters listed on the Singapore Exchange (SGX). But economists caution that high oil prices could also weigh on Singapore’s economy, particularly since the city-state is a net oil importer.

The grouping Opec+, which comprises members of the Organization of the Petroleum Exporting Countries (Opec) as well as major non-Opec oil producers such as Russia, on Sunday (Apr 2) announced it would cut oil output by about 1.2 million barrels per day (bpd). 

Reuters said this brings the total volume of pledged cuts by Opec+ to about 3.7 million bpd since October last year, equal to 3.7 per cent of global demand.

Crude oil prices reacted to the news. As at Singapore market close, Brent crude futures were up 5.1 per cent at US$83.96, while West Texas Intermediate crude oil was up 4 per cent at US$79.63. 

RHB analysts, however, said the cuts were a “positive surprise”. They had anticipated price-supportive measures only in the later part of this year. The analysts hiked their Brent crude oil price assumption for this year to US$85 per barrel, from US$83 per barrel, and are keeping their projections for 2024 to 2025 at US$80 per barrel.

“We also believe prices are likely to remain intact, as Opec’s influence remains strong and its strategy to protect the oil market – via production cuts – also remains intact,” they added. 

Singapore-listed oil stocks reacted positively on Monday. Geo Energy Resources , Rex International , RH Petrogas , Kim Heng and Mencast generated price gains in the range of 3 per cent to 18 per cent in the morning trading session. All five stocks also closed higher on Monday. 

“While upstream oil players are seen as more price-takers, both companies have been working to expand output,” said SGX market strategist Geoff Howie. 

DBS analysts were also more positive on upstream players. In a note on Monday, they said higher oil prices could fuel interest in vessel builders such as Yangzijiang Shipbuilding and Sembcorp Marine .

Yangzijiang Shipbuilding is their top local pick, as the group is looking to accelerate its offshore capital expenditure this year.

Sembmarine’s recent offshore renewable contract win worth six billion euros (S$8.7 billion) could lift the company’s order book to more than S$22 billion, which the analysts termed a “further positive” for the stock.

Companies in the downstream oil space, such as Union Gas , can expect a negative hit from the rise in oil prices, the analysts said.

They also see higher prices creating an “overhang” for stocks in the transport and aviation sectors – namely Singapore Airlines (SIA) and ComfortDelGro . 

About 40 per cent of SIA’s projected fuel consumption is hedged till June. ComfortDelGro incurred higher electricity and fuel costs in FY2022, though the latter was mitigated by fuel indexation.

RHB, meanwhile, said it is keeping its “overweight” call on the regional oil and gas space, with Malaysia-listed Dayang Enterprise, Malaysia Marine and Heavy Engineering and Yinson as top picks.

The impact on Singapore’s economy, however, could be negative. Maybank Securities economist Lee Ju Ye said a 10 per cent increase in oil prices would cause Singapore’s current account balance to fall by 0.4 per cent of its gross domestic product.

“Higher oil price risks are fanning inflationary pressures when core inflation is already at 14-year highs,” added Lee. “Electricity tariffs and petrol costs may climb further alongside higher global oil prices, after having eased in recent months.”

She said the city-state’s core inflation levels are now likely to remain elevated for longer, and is expecting the Monetary Authority of Singapore to raise its inflation forecast to the range of 4-5 per cent in the upcoming meeting from the current 3.5-4.5 per cent. 

Heng Koon How, UOB’s head of markets strategy, said the latest output cuts will “put a floor” around Brent at around the US$80 per barrel level. He said the commodity is expected to trade around the US$80 per barrel mark in Q2 and Q3 this year, but will move up to US$90 per barrel in Q4 this year and Q1 next year.

“Over the longer run, higher energy prices will undoubtedly add to inflationary risk as it will result in higher manufacturing costs, shipping costs and transportation costs,” he said, adding that Singapore’s monetary policy will stay “tighter for longer”.