Analysts more concerned about inflation and the US economy

(SINGAPORE) The price of crude oil went above US$115 on Wednesday but industry watchers here remained indifferent to the tumbling of yet another record. Economists say rising inflation and the flaccid US economy are of greater concern, while analysts say the stock market has remained largely unscathed apart from sentiment-driven reaction.

'Oil prices have been going up all this time, so it's not new in that sense,' said an equities research head. Ho Woei Chen, an economist with UOB Bank, noted there was less emphasis on oil prices now compared to previous surges in 2003 and 2004.

'Then there were many reports on the impact on the economy. But businesses were more resilient than expected,' she said.

Companies have recently been performing 'very well', noted Ms Ho, which has so far cushioned the impact of rising oil costs and margin squeeze. But this is likely to change soon, said Citi economist Kit Wei Zheng, pointing to poor domestic export numbers released yesterday as a sign that global demand was slowing.

Mr Kit said by itself the high price of crude oil was not something to lose sleep over. More worrying was inflation, because 'prices are rising in all the wrong places', he said, even as demand softens, crimping the ability of producers to pass costs on to their customers.

As input prices are now rising faster than output prices, this was a 'double whammy' for them, he explained.

The soaring local currency is not helping, either, he added. Some companies may be booking extensive translation losses after last week's surprise move by the Monetary Authority of Singapore to recentre the Sing dollar's trading band. 'Essentially they made six months of appreciation in one day,' said Mr Kit.

An equities research analyst said transport stocks such as ComfortDelGro would be directly affected as rising fuel cost squeezes margins, but some other counters would see mostly 'sentiment-driven' reaction, he said.

Singapore Airlines, for example, often gets penalised whenever oil prices rise. 'But they've been very successful at passing on fuel costs to their customers, although investors may be worried about falling demand,' he noted.

He also pointed to offshore and marine stocks, which get a boost on positive oil news. Sembcorp Marine, for example, climbed 14 cents to $3.86 yesterday. 'It doesn't mean when the oil price goes up, you'll see more rigs and contracts immediately. But going up is always better than going down.' He said the news of a mammoth oil find in Brazil was also driving exploration and production plays, noting that the 'Brazilians like to use Singapore yards.'

Another analyst said that persistently high oil prices would continue to support palm oil stocks. 'In the medium term, this will drive demand for biofuels,' he pointed out. Wilmar, the largest plantation play listed in Singapore, rose 16 cents yesterday to $4.52.

But whether oil will come down from its recent highs is an open question. UOB's Ms Ho said oil prices should not stay buoyant if the economy starts to stutter. 'If growth is coming off, then oil prices are expected to come down,' she said.

Citi's Mr Kit said crude oil 'appears to have entered a new trading range', supported by the continued weakening of the US dollar against key currencies like the euro. But where oil goes from here remains a big 'question mark', he added.

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