Oil prices likely to be both boon and bane for Singapore

Oil prices will likely strengthen next year, which will have mixed effects for the Singaporean oil and gas sector, BMI Research said yesterday.

It expects oil prices to average US$55 a barrel throughout next year, up from US$45.50 this year - an increase to be driven by a sizeable fall in output among producers such as a China, Mexico and Columbia and strong fuel consumption growth in emerging markets.

Costlier crude will be negative for the domestic refining sector, but the gradual return of risk appetite among global exploration and production players should prove beneficial for the embattled oilfield services sector, BMI said in a report.

"In the short term, higher crude prices could prove a boon for Singapore's refiners, by driving up the value of crude oil and refined products in Singapore's storage hubs.

"However, in the longer term, as pricier crude will be passed onto consumers in the form of more expensive fuels, it will dampen demand growth and squeeze earnings," it wrote.

"Refiners in Singapore are already enduring challenging market conditions, not least due to a persistent oversupply of fuels in the regional market, alongside surging Chinese exports and slower demand growth in many developed markets."

So any negative impact on sales due to higher retail prices will be a further drag on performance, BMI said.

But higher oil prices could extend a lifeline to the oilfield services industry here, which has suffered significant losses in business.

As crude prices plunged in the past two years, global spending on exploration and production also nosedived, which led to a decline in demand for oilfield services. This has led to cash flow problems and mounting debt obligations among firms such as Marco Polo Marine, Ezra Holdings and Rickmers Maritime. It even led to two firms, Swiber Holdings and Swissco Holdings, filing for judicial management.

A material strengthening in oil prices would give such firms a boost, said BMI, which believes global capital expenditure on oil and gas projects could grow by as much as 2.5 per cent next year.

Efforts made in the industry over the past two years to repair balance sheets and reorganise businesses to operate more effectively amid lower oil prices will allow firms to take larger investment decisions in the months ahead, providing more opportunities for oilfield service providers, it noted.

A version of this article appeared in the print edition of The Straits Times on December 10, 2016, with the headline 'Oil prices likely to be both boon and bane for S'pore'. Print Edition | Subscribe