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3 Reasons For Investors To Be Pessimistic About The Oil And Gas Industry In Singapore

It would be an understatement to say that there have been violent movements in oil prices over the past three years. In that window of time, we have seen oil prices fall from a height of over US$120 per barrel to less than US$30 per barrel.

At present, oil prices are around US$50 per barrel. Although that’s a significant gain from the lows of less than US$30, it also represents a huge decline from the high. The situation has not been easy for the oil and gas companies in Singapore. Many of them, in particular those with high debt levels, are struggling to survive at the moment.

I thus thought it would be interesting and useful to explore the reasons for optimism as well as pessimism about the oil and gas industry in Singapore. In this article, I would be sharing the negative things that I’m seeing. For the positive shoots, you can check out here.

Competition from other energy sources

Oil and gas are just two of the many commodities that are available in the world to generate power. And, they are not the only ones suffering from issues of oversupply.

Coal, another big energy commodity, is also oversupplied, particularly in Asia. If oil prices increase – due to factors such as a cut in oil production by major producers – it may influence more companies and governments to switch their fuel source to a cheaper alternative such as coal.

Moreover, renewable energy is also gaining popularity. China is now the world’ largest renewable energy investor, after investing over US$100 billion in 2015, more than the next three countries combined. The Asian giant also recently announced plans to invest US$360 billion in clean and renewable energy by 2020.

If one of the world’s largest consumers of energy, China, is determined to have more of its energy consumption being fed by renewable sources, what would be the long-term future of oil and gas in the next decade?

The offshore and marine sector may be the last to recover

Many of Singapore’s companies in the oil and gas industry belong to the offshore and marine sector. But, due to the higher cost of production for offshore drilling, this segment may be the last to recover even if oil prices do stabilise at a higher point from their current level of around US$50.

In addition, many fabricators and asset owners within the offshore and marine sector have been building speculatively – they have been constructing new drilling rigs and offshore support vessels even before any orders are placed.

Such assets are coming online soon and they do not have any customers waiting for them. It could take a long time for the market to absorb the supply.

Creditors’ willingness to negotiate

In my aforementioned article on the reasons for optimism for the oil and gas industry in Singapore (link is here, again), I mentioned that lenders have shown their willingness to support companies in the oil and gas industry through this tough time.

However, this situation can also be seen as a negative as it goes against the nature of a free market.

If financing does not dry up for many of the highly-geared and unprofitable oil and gas companies, there is no way for the industry to consolidate and reduce supply in the market. Without a significant reduction in the overall supply, the market has to wait till demand picks up again.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.