In the first week of 2021, a triple whammy caused a surge in crude oil prices, with North Sea Brent rising to US$70.73 per barrel ($93 per barrel) initially on Jan 6, the commodity’s highest level since Sept 2020, but fell back to US$53 per barrel during the afternoon in London. As at Jan 7, North Sea Brent is at US$54.43 per barrel.
Firmer 10-year US treasury yields, concerns over an Iranian retaliation for the murder of Qasem Suleimani a year ago by the Trump administration against a backdrop of chaos in the US Capitol, and news that Saudi Arabia will cut production by 1 million barrels per day voluntarily in February and March this year caused the jump in North Sea Brent.
RBC Capital Markets argues that the Saudi cut may not impact global production much. “Russia will be able to benefit from [the] price move, especially as it will be allowed to increase output by 75,000 barrels per day in combination with Kazakhstan.”
Hence, it appears increasingly likely that firmer oil prices are likely to be temporary rather than a sustained upmove. At any rate, oil is a volatile commodity. In Singapore oil plays are few and far between. During the oil boom of the early 2000s, investors played the theme through capital goods, such as oil rigs. At one point, Keppel Corp and Sembcorp Marine were the world’s largest and second largest producers of jack-up rigs.
Now, in the wake of global warming and a focus on sustainability, Keppel and Sembcorp Marine have pivoted to producing support vessels and rigs for offshore wind farms, including FSPOs (floating, storage, production, offloading vessels) and FLNG carriers (floating liquified natural gas).
Among the duo, Keppel is a better longterm bet. Its chart shows its quarterly momentum rebounding off its own moving average. Prices have been entrenched within a narrow range since mid-November 2020. Quarterly momentum isn’t sufficient to trigger a breakout. A burst of volume is required to take prices out of the resistance/breakout area at the $5.40–$5.50 range. Till then, and when short- and medium-term technical indicators are more aligned, prices are likely to range from $5.23, the level of the 200-day moving average which has just turned up, and the resistance/breakout level.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
Sembcorp Marine, now a penny stock, rose on the back of a surge in volume on Jan 6. While intuition may indicate this is not sustainable, short-term indicators have just turned up. Directional movement indicators, which had been neutral till the start of 2021, have started to turn positive. That should support a price advance to $0.26. Prices will not rise immediately to $0.26, which represents a 60% gain on Sembcorp Marine’s last done price of $0.164 as at Jan 7. Prices would probably ease initially. It may even be that prices are in a multi-month base formation for which $0.26 could be the upper bound. As such, the downside is likely to be limited to $0.14. Risk versus reward points to greater probability of reward.
