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Here’s What SembCorp Industries Limited’s Chief Executive Said About Oil Prices

There are many things in the world of business and finance that even chief executive officers of large companies cannot predict.

The price of oil is one of those things. In a recent briefing for Sembcorp Industries Limited‘s (SGX: U96) 2015 full-year earnings, the company’s chief executive, Tang  Kin Fei, shared his view on the direction of the price of oil. He mused:  

“Nobody will know when the oil and gas market will recover, that is the big crystal ball. If I know the answer … That’s really difficult to predict.”

Some may consider Tang’s words to be a surprise. After all, he is the head of a sprawling conglomerate with a huge offshore and marine engineering arm that can be dependent on the level of the price of oil. (52% of Sembcorp Industries’ total revenue of S$9.54 billion in 2015 came from its majority stake in oil rig builder Sembcorp Marine Ltd  (SGX: S51).)

But to be sure, Tang is not the only one with such a view. Wee Ee Cheong, the chief executive of United Overseas Bank Ltd (SGX: U11), one of the big three local banks in Singapore with S$316 billion in total assets, also expressed the same sentiment in an analyst briefing:  

“This is a very unfortunate thing. Who can predict the oil price – from $100 over dollars to $30 dollars? Right? So, nobody is able to do that.”

Wee may have a point here.

Diving oil prices

Oil prices have indeed fallen off a cliff over the past two years. This is summarized in the chart below.

2016-04-02 Oil Price Chart
Source: NASDAQ

If you’re thinking that Wee and Tang were copping out, then consider this: F ew (if any) saw the crash coming. In fact, the majority of economists didn’t see oil prices falling as well .

Take a look at the tweet below which shows the consensus predictions for the price of oil made on various dates between Janaury 2014 and January 2015 as well as the actual movement of the price of oil. From the chart, most economists thought that oil would be trading above US$70 per barrel near the end of 2015. In actual fact, oil ended 2015 at the US$40 range.

Those forecasts on the movement of oil prices had missed the mark, to say the least.

Foolish summary

If an investment thesis for a company relies on predicting the short-term direction of oil prices alone, we may not be investing. Instead, we may be speculating.

Better things that could go into building an investment thesis could be the amount of cash and debt a company has on its balance sheet. Having lots of cash and little debt could help a company tide over difficult times. Things such as the gap between a company’s stock price and intrinsic value could also be crucial building blocks of an investment thesis.

All told, there are many better things to consider as compared to guessing the direction of oil prices over the next few weeks or months. As we’ve seen, even chief executives of large companies and intelligent economists have a tough time doing it – this speaks to the difficulty and futility of trying to forecast the fuel’s price. 

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.