ERA OF EASY MONEY COMES TO AN END: Concern over impact of low oil prices on future investments

MANY view with concern the impact of low oil prices on investments in new supplies for the rest of and the coming decade.

Low oil prices will likely lead to reduced investment in new exploration or development, and put at risk oil investment projects in low income countries or in unconventional sources such as shale oil,tar sands, deep sea oil fields and oil in the Artic zone, said LeeHeng Guie, executive director, Socio Economic Research Centre.

It may also delay investment in renewable energy and some fossil fuel industry projects.

“Players have to focus on a sustainable business model as oil revenue shrinks relative to high operating and capital expenditure (capex),” said Lee.
That is certainly a problem but there is hope that low oil prices will be a temporary issue and will not haunt us all the time, said Pong Teng Siew, head of research, Inter-Pacific Securities.

Some oil experts are of the view that oil price will likely rise to the mid US$50 per barrel range next year.

“The price level that we are at is not one that is going to provide the investments needed to meet demand needs over the next half-decade,” IHS Markit Ltd vice chairman Daniel Yergin told Bloomberg.

The market is rebalancing as the global oversupply diminishes, with US crude production set to fall another “couple of hundred thousand” barrels a day by the end of this year, and the recovery will be unaffected by any Opec decision to freeze output, Yergin, a veteran observer of the oil market, was quoted as saying.

And when demand for oil subsequently improves, there will likely be a scramble for new investments.

“Given that some capital investments such in as ships, barges and topsides will take some time to be commissioned, there may be a potential shortage of such equipment for the next few years,” said Nazlee Khalifah, CEO, Affin Islamic Bank.

But for now, with oil prices hovering between US$40-US$50 per barrel, new capex and investments are not likely to increase.

The impact will likely be felt most by those solely seeking new investment contracts; already, cost reduction measures have been put in place by these players, said Danny Wong, CEO, Areca Capital.

However, there are still opportunities for existing maintenance and servicing contracts.

One sector – traders and speculators – may gain from the current low in new oil investments when the price of oil rallies on any news of a potential disruption in supply, said Wong.

Given the gradual shift towards more renewables and usage of electric cars, demand for oil may slowly flatten out, said Chris Eng, head of research, Etiqa Insurance &Takaful.

“So, even with minimal new investments, oil prices may be range bound for some time, said Eng, adding that the problem may be more related to increasing energy storage such as for batteries, cheaply.

Which is a good point to note for the future; for the present, demand for oil is clearly rising with no discernable impact from renewables and usage of electric cars, said Pong.

Odds are slipping for a US Fed rate hike following the release of non-farm payroll data last Friday, said Pong.

“A few months of strong US economic data has been followed by progressively weaker data, said Pong who views that a recession in the US looks ‘almost certain to arrive in less than a year,’ although at the moment, few economists would concede to that.

US non-farm payrolls rose by 151,000 jobs in August after an upwardly revised 275,000 increase in July, with job cuts in manufacturing and construction, said Reuters, quoting the US Labour Department.

Economists polled by Reuters had forecast payrolls rising 180,000 last month.

On Wall Street, investors feared the weaker-than-expected August employment report will not be enough to dissuade the Federal Reserve from raising interest rates as soon as this month, said Reuters.

The question is whether that recession will be accompanied by a financial crisis. “My bet is, yes it will,’’ said Pong.

One of the triggers would be the rise in US default rates.

In 2014, the corporate default rate was 1.4%; in the following year, it had risen to 2.8%. In July, it spiked to 4.8%.

Singaporean households who are refinancing their existing mortgages will be exempted from a 60% cap on their total debt-servicing ratio (TDSR), said Bloomberg, quoting a statement from the Monetary Authority of Singapore (MAS).

The exemption, which takes effect immediately, only applies to owner-occupiers, MAS was quoted as saying, adding that the latest move does not represent an easing of the property cooling measures

The so-called TDSR framework was introduced in Singapore in 2013 to ensure that borrowers are not over-leveraged.

It calculates the percentage of a borrower’s income that can go into servicing his loan.

That means his housing loan repayments, after adding all his repayment obligations (for example, student loans, credit card debts, car loans and personal loans), cannot exceed 60% of his income, according to MoneySmart.

For investment property loans, borrowers who bought the property after the threshold was introduced will also now be able to refinance, provided they commit to a debt reduction plan and fulfill a credit assessment with their financial institution, the central bank was quoted as saying.

With the downturn in some major sectors of the economy, pay cuts and retrenchments, this move would help borrowers roll over their mortgages.

The emphasis is on prudent spending and to have a second line of income, if possible.

Columnist Yap Leng Kuen hopes that this is not ‘the calm before the storm’ in relation to problems that can beset slowing or weak economies. – ANN