What Investors Need to Know About Oil Price Today

As investors, we often try to predict the future performance of a company by focusing on the business operation and the external macro environment, such as the economy, politics etc.…

Usually, our effort spent in understanding the business operation yields better result than our prediction of the future macro environment.

But does it mean that we should completely ignore the macro economy environment?

I believe the answer is no. Personally, I would argue that we need to at least know where we stand at the moment from the macro environment perspective.

So here are a few facts about one important factor in the economy, namely, oil prices.

  1. Brent crude dipped below USD $40 a barrel, compared to over US$100 just a year ago
  2. OPEC has not provided any clear sign to reduce current oil production
  3. China growth is expected to decline to less than 7% – demand of oil may not rise

So, how can investors benefit from low oil price?

There is no direct answer of how can investors benefit from low oil price. Yet, we can use this as a good starting point to search for potential good investment ideas.

For example, low oil prices are a positive to industries such as airlines, tourism, transport and petrochemicals. If oil remains at current low level for an extended period of time, industries such as airlines, transport and manufacturing could benefit directly due to lower cost. Meanwhile, tourism could benefit indirectly due to increase in foreign tourists as a result of lower ticket prices.

Thus, investors might consider looking into Singapore Airlines (SGX: C6L), ComfortDelGro (SGX: C52) and Megachem (SGX: 5DS).

There are ideas for contrarian investors, too.

Many investors might avoid the entire oil industry, since the companies in this industry could be reporting some ugly numbers. Yet some contrarian investors could argue that this is precisely the best time to consider these companies, since investors’ pessimism pushed prices of some good companies to multi-year lows.

For example, companies such as Sembcorp Marine (SGX: S51) and Keppel Corporation (SGX: BN4) are trading at low price to book with possible good dividend yield.

There is no right or wrong answer to investing. So we need to understand our tolerance to risk in order that we can choose the right companies for our long-term portfolio.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.