The OPEC’s (Organisation of the Petroleum Exporting Countries; it controls roughly a third of global oil output) recent refusal to cut the production of oil had exacerbated the decline in the price of oil, culminating in Brent crude falling by almost 40% over just four short months to around US$70 per barrel currently. But the phrase “one man’s meat is another man’s poison” is apt here – there are always two sides to a coin. So while the drop in oil would be painful for some, it’d also benefit others. Let’s take a look at the winners and losers….
The OPEC’s (Organisation of the Petroleum Exporting Countries; it controls roughly a third of global oil output) recent refusal to cut the production of oil had exacerbated the decline in the price of oil, culminating in Brent crude falling by almost 40% over just four short months to around US$70 per barrel currently.
But the phrase “one man’s meat is another man’s poison” is apt here – there are always two sides to a coin. So while the drop in oil would be painful for some, it’d also benefit others. Let’s take a look at the winners and losers.
The most notable beneficiary of falling crude prices would be the airlines as jet fuel constitutes a large part of their costs. For example, in the six months ended 30 September 2014, fuel costs made up 36.9% of Singapore Airlines Ltd’s (SGX: C6L) revenue of S$7.59 billion. According to the Singapore Business Review, analysts from brokerage firm CIMB said that Singapore Airlines burns through 37 million barrels of jet fuel annually; a US$25 per barrel reduction in the price of oil can result in an estimated S$1.2 billion in cost reductions.
Transport-related companies, such as ComfortDelgro Corporation Limited (SGX: C52), and petrochemicals producers, like Megachem Limited (SGX: 5DS), can also benefit. Lower oil prices, at least over the short-term, would mean lower input costs for them, leading to higher profit margins.
And who can forget about consumers in general? There’s much to cheer for consumers when it comes to lower oil prices as it usually means cheaper petrol at the pump.
The most obvious category of losers would be the entire energy industry. In time of sustained low oil prices, the drillers will earn lesser profits and thus slow down their exploration of oil. This in turn leads to lower need to build rigs (hurting the rig builders) and also lesser need for support services (hurting the service providers).
In Singapore’s share market, there are two prominent rig builders in the blue chips Sembcorp Marine Ltd (SGX: S51) and Keppel Corporation Limited (SGX: BN4). Their businesses may see continued pressure as oil prices are not expected to pick up soon. The share market has already displayed its pessimism on the fortunes of the two firms with their share prices have declined by 29% and 21% respectively since the start of June 2014.
Countries which are heavily dependent on the export of oil, like Venezuela and Nigeria, are also big losers from the recent oil rout.
What about Singapore’s economy?
Although Singapore does not have any oil reserves to boast of, it is actually among the world’s top three oil refining centers and is also Asia’s largest trading hub for the fuel. As a matter of fact, the oil industry contributes around 5% of Singapore’s gross domestic product (GDP) and oil and gas firms make up 5.6% of the stock market benchmark, the Strait Times Index (SGX: ^STI). On the balance, taking into account what I’ve just mentioned, lower oil prices may not bode so well for Singapore as a whole.
In all, lower oil prices may mean different things to different people. Some may think that oil prices have fallen too sharply, too fast, and are betting for a rebound. Others may feel that oil prices will continue its decline over the next year. Opinions are aplenty, therefore, it is important for you to do your own due diligence and keep abreast of recent developments before you make your move.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.