Stronger oil prices could turn a bane for Singapore refiners

Refining margins are still below 2014 and 2015 levels.

BMI Research believes that stronger oil prices will have a mixed impact on the Singaporean oil and gas sector.

Higher crude feedstock costs and retail fuel prices for end-users, it said, will hit demand and drag on the domestic refining sector.

Meanwhile, a stronger price environment will allow risk appetite among global E&P players to gradually return, driving demand for Singaporean oilfield services.

BMI forecasts the price of Brent to strengthen next year averaging USD55.0/bbl in 2017, from USD45.5/bbl in 2016.

It believes sizable output declines among high-cost producers such as China, Mexico and Columbia, and strong fuels consumption growth in emerging markets will drive a gradual rebalancing of the oil market, supporting prices over the coming quarters.

Here's more from BMI:

In the short-term, higher crude prices could prove a boon for Singapore's refiners, by driving-up the value of crude oil and refined products in Singapore's storage hubs.

However, in the longer-term, as pricier crude will be passed onto consumers in the form of more expensive fuels, it will dampen demand
growth and squeeze earnings.

Refiners in Singapore are already enduring challenging market conditions this year, not least due to a persistent oversupply of fuels in the regional market, alongside surging Chinese exports and slower demand growth in many developed markets.

Thus, any negative impact on sales due to higher retail prices will be a further drag on their performance.

Bloomberg data shows that while refining margins in Singapore have rebounded from a low in April 2016, they are still significantly below those levels experienced in 2014 and 2015.

Moreover, average combined fuel stockpiles in Singapore to date (M1116) are up 4.3% on year, indicating weaker demand from regional and international customers.