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What An Oil Rebound Could Mean For Keppel Corporation Limited, Ezion, and Sembcorp Marine Ltd

Three weeks ago, I wrote about falling oil prices. At that time, crude prices fell for nine consecutive days to around US$35.

I reasoned back then that despite the very public disagreement about freezing oil production, it could be still be in the interest of major oil producers to arrive at some sort of agreement. There was, however, no agreement at the recent Doha meeting of oil producing nations.

But, oil prices had been recovering over the past three weeks. This is in spite of an ongoing spat between Saudi Arabia and Iran.

Saudi Arabia also succeeded in worrying the markets with threats to sell a key US oil refinery. This was in response to President Obama’s comments to ‘share’ the Middle East with Iran.

Factors encouraging higher oil prices ahead

In situations like these, it is not always easy to differentiate bluster from economics and politics. But it is important to recognise that the oil industry is cyclical in nature.

It might not have seemed that way in the recent past, when the demand for oil was almost insatiable.

But the economics of reality always prevail – US oil producers have been cutting back. The US Energy Information Administration (EIA) announced that America produced 1 million fewer barrels of oil than expected last week.

Meanwhile, another organisation with a three-letter acronym, the International Energy Agency (IEA), said it expects the oil market to come back into balance by next year.

The other factor that is helping oil prices is the reported stabilising of China’s economy. China said its economy grew by 6.7% in the first-quarter of 2016, which was better than expected.

Taken together, these could point to strong demand for oil – not that demand had ever fallen off a cliff.

While China might not grow at 7% in the near future, its economy does appear to be stronger than expected. A notable concern, though, is whether the country is able to cope with rising debt.

As oil prices continue its cyclical recovery, oil and gas companies could come back to the fore. Companies in Singapore’s stock market that have big exposure to the oil and gas industry include Ezion (SGX: 5ME), Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51).

But bear in mind that to capitalise on the possible recovery in oil prices, oil services companies also need strong balance sheets to weather the downturn until that happens.

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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 Ong Kai Kiat does not own shares in any companies mentioned.