War stokes rally in SGX's oil, commodity stocks

NEVER be ashamed to admit you were wrong.

In mid-January this year, Canadian investment bank RBC Capital Markets' analysts admitted they made the wrong call with their "under perform" rating on US oil giant Exxon Mobil. The house's change of heart to a "perform" was fuelled by a sharp rally in crude prices on the back of robust demand and tight market conditions, which in turn has led to renewed investor interest in energy stocks. It was a good call, albeit late, more so in hindsight.

Oil and gas stocks were already set for a roaring time as they entered 2022. Last year, crude prices averaged 73 per cent higher than 2020, the year the pandemic shock brought the commodity to its knees as demand was decimated by lockdowns and mobility curbs; from doom to boom, indeed.

But the Russia-Ukraine war has turned up the volume on commodity plays to a whole different level. On the Singapore Exchange (SGX), the conflict in Eastern Europe has supercharged bets on shares of energy firms as well as the wider commodity complex.

The spikes have been extraordinary. On Monday (Mar 7), crude benchmarks jumped more than 10 per cent in the Asian session, blasting past US$130 a barrel - the highest since July 2008 - as the US and EU mull a ban on Russian crude imports after a slew of sanctions imposed earlier failed to see Moscow back down on its aggression in Ukraine.

Even without the boycott, the oil sector was already facing a supply shock. If Russia's oil exports are cut off, analysts at Bank of America estimate that the shortfall could be 5 million barrels or more. Pundits have forecast that it could push crude prices to as high as US$185 a barrel, or even US$200 a barrel. At a certain high price point, expect demand destruction to set in. But that may take awhile given the tight market and resilient demand of the economic recovery in a post-pandemic market.

Playing favourites

On the SGX, a few reversal-of-fortune and on-the-mend stories in the oil and oil-related sectors have warmed investors' hearts.

Led by the prospect of more order wins as oil majors pump up capital expenditure amid rising prices and the longer-term narrative of more offshore renewable jobs, loss-making Sembcorp Marine has gained 11 per cent so far this year (as at Mar 4) on much-galvanised trading volumes. Coupled with the the widely-held notion that the worst may be over, the proposed mega merger with Keppel Offshore & Marine units make this firm a must watch.

Two oil plays - RH Petrogas and Rex International Holding - have also enjoyed an outpouring of attention with spectacular gains of 103 per cent and 43 per cent, respectively, year to last Friday. Their story is easy to like. Both firms reversed their FY2020 losses to healthy profits in FY2021, buoyed by significantly higher average realised oil prices.

Some guys have all the luck too in terms of timing. Catalist-listed Rex International, with a market capitalisation of some S$625 million - nearly double that of RH Petrogas - moves over to the big league of SGX's mainboard on Tuesday (Mar 8). Emboldened by the outlook, the firm has also sweetened its proposition with a regular dividend policy to boot.

Multiple plays

Amid all the market play involving fossil fuels, Sembcorp Industries, an energy giant that turned up the green in its portfolio, has emerged as the top performer among the Straits Times Index constituents and gained 34 per cent this year. The counter last traded at these current levels in August 2014.

For some others, oil's rosy patch has come too late. Ezion Holdings - once a star in SGX's offshore & marine space and one of the world's largest owners of liftboats - whose debts in 2017 became too much to bear, followed by the pandemic which scuppered a rescue deal by a white knight, said two weeks ago that it has been wound up.

As for China Aviation Oil, its prospects appear cloudy given the uncertainty of when China, led by its zero Covid-19 policy, will reopen its border for travel; the company's earnings substantially hinge on international traffic. The tight crude oil market could also make it challenging for the group's trading operations, reckons one analyst.

Market dynamics and the Russia-Ukraine war have also amped up the volume on other commodity stocks, from agriculture to food, coal and metals. They include agri-giant Golden Agri-Resources and coal miners Geo Energy Resources and Golden Energy and Resources, whose shares have advanced between 33 and 66 per cent this year, according to data provided by SGX market strategist Geoff Howie.

As with all stunning surges of this kind, the question is how sustainable is the commodities, and chiefly, the oil rally, and when will the sizzle end? It is unclear if this could still hold true in a post-pandemic market, but a popular saying in the commodities market comes to mind - the best cure for high oil prices is high oil prices.

READ MORE: Asian markets dive as oil prices spike, Ukraine crisis rattles investors