Reason for optimism despite commodities' mixed outlook

Analysts say the few gold-related stocks on the SGX, such as CNMC Goldmine, which has a mine in Kelantan (right), are worth a look this year.
Analysts say the few gold-related stocks on the SGX, such as CNMC Goldmine, which has a mine in Kelantan (above), are worth a look this year.BT FILE PHOTO

Sluggish oil prices expected to rise due to demand in China and India, say analysts

Commodity markets have started the year with a mixed performance, with crude oil futures below last month's level while gold has been on the rise.

Market watchers do not see any big rebound in the coming months but some positive momentum can be expected, potentially benefiting local stocks in these sectors.

The energy industry has been a laggard this month, with benchmark Brent crude futures mostly staying below US$56 a barrel.

Its lacklustre effort comes after the initial euphoria over the Organisation of Petroleum Exporting Countries' pledge last year to cut production has cooled off. However, the big picture is still one of gradual rebalancing between prices and supply. "Our estimate is for oil prices to touch US$60 by the end of the first half (of 2017)," OCBC commodity economist Barnabas Gan told The Straits Times.

One reason for optimism is the healthy demand seen in China and India. China's state-owned China National Petroleum Corporation recently stated that the country's crude oil imports are likely to grow 4.6 per cent year-on-year in 2017.

But others have warned about uncertainty over the border adjustment tax being considered for implementation in the United States. Broadly, the policy aims at taxing imports, including oil products.

"The tax has the potential to significantly alter global energy trade flows and pricing," Citi Research said in a report last week.

However, Mr Gan shrugged off the impact from this front: "This is just one of the many speculations around the Trump presidency's plans; hardly anything concrete. The idea is to bring the US energy independence, but that's not looking possible before 2040."

Against this backdrop, some local stocks in the maritime and offshore services sector may be worth a closer look this year. "We have seen (crude oil) rally somewhat from the end of September 2016, and we also saw the SGX Maritime and Offshore Services Index rallying around 20 per cent from its trough over the same period," Singapore Exchange market strategist Geoff Howie told a briefing yesterday.

"The ones that will benefit the most from crude oil recovery will be the upstream explorers and producers. The SGX doesn't have many of these, but our leader in this space, KrisEnergy, has stood out."

Shares in KrisEnergy, which focuses on production in South-east Asia, have jumped over 80 per cent since last September to 19.6 cents at yesterday's close. Mr Howie said the few gold-related stocks on the Singapore Exchange (SGX), such as CNMC Goldmine and Wilton Resources, are also worth a look.

CNMC Goldmine was the top performer in the SGX's materials sector last year with a total return of 127.5 per cent. It closed at 41.5 cents yesterday, down 4.6 per cent since the end of last month.

Gold was around US$1,213 an ounce yesterday, up almost 6 per cent this month.ABN Amro noted in its January commodity report: "The last leg of a powerful rally in the US dollar is under way and this is weighing on gold. Prices could drop below US$1,100 per ounce and approach the 2015 low of US$1,046 per ounce."

Mr Gan offered a different view: "Inflation expectations in the US are rising, and can be a driver that takes the yellow metal higher, given gold's role as an inflation hedge. Elsewhere, some talk has risen over higher Chinese physical gold demand over the Chinese New Year, and this should support gold prices over the next two weeks."

A version of this article appeared in the print edition of The Straits Times on January 24, 2017, with the headline 'Reason for optimism despite commodities' mixed outlook'. Print Edition | Subscribe