Why It Matters

Worries remain despite oil rally

Singapore's offshore and marine industry has been hit hard by the protracted oil price rout over the past two years.

But a successful agreement last Wednesday by the Organisation of Petroleum Exporting Countries (Opec) to cut production amid an oil supply glut could improve the outlook for the sector, which accounts for about 11 per cent of manufacturing here.

The cartel has agreed to cut output by 1.2 million barrels a day for the first six months of next year - an announcement which pushed oil prices up more than 10 per cent to US$54 per barrel.

Economists have voiced hopes that stabilising oil prices could alleviate further deterioration in the balance sheets of oil and gas companies, and help keep local banks' non-performing loans to the troubled sector from worsening.

But the Singapore Business Federation has warned that even if oil prices were to recover, the oil and gas sector, which is estimated to have lost up to 15,000 jobs, may not bounce back to pre-slump days.

Global excess capacity - the result of over-investment in the last price upswing - is hampering recovery.

Crude prices are not expected to recover to previous highs of US$110 per barrel in the near future. This means inflation, which has plumbed historic depths in many developed economies in the wake of sliding oil prices, will remain low.

One of the reasons is higher shale production in the United States, which has been trying to reduce its dependence on imported crude. Bank of Singapore chief economist Richard Jerram pointed out that shale has "changed the dynamics of oil production".

"The US rig count is already up nearly 50 per cent from the lows of May this year as producers respond to the prospect of higher profitability," he noted.

With the rise of shale, uncertainty over President-elect Donald Trump's approach to US energy policies and questions over whether Opec can commit to the agreed cuts given its chequered history on compliance, it is too early to tell if the oil price recovery is sustainable.

A version of this article appeared in the print edition of The Straits Times on December 05, 2016, with the headline 'Worries remain despite oil rally'. Print Edition | Subscribe