Falling oil price fuelling market jitters

Crude oil's sharp price plunge capped a nervy week for global stock markets as investors turned jittery over whether the sudden decline may do harm to countries' economies even as consumers gain from lower prices.

The price of benchmark Brent crude declined by more than 3 per cent in just one day last Friday to hit US$61.76, making it a 45 per cent crash since June.

On Wall Street, the Dow Jones Industrial Average fell 1.79 per cent and the S&P 500 lost 1.62 per cent, making it the first weekly loss in nearly two months.

In Europe, London's benchmark FTSE 100 index slumped 2.49 per cent, France's CAC 40 lost 2.77 per cent, and Frankfurt's DAX 30 dropped 2.72 per cent.

While lower oil prices spell good news for certain sectors of the economy such as airlines, with industry body IATA last week predicting record profits, demand from key economies such as China is slowing, in a sign that the global economy may not grow as fast as expected. The Paris-based International Energy Agency slashed its 2015 global demand outlook for oil to less than 1 per cent next year.

"Investors are watching oil and they don't know what to make of it," Agence France-Presse quoted Mr Jack Ablin, chief investment officer at BMO Private Bank, as saying. "There's a cloud hanging over the market," he added.

But Mr Alan Skrainka, chief investment officer at Cornerstone Wealth Management, said the fears were overblown, and that "falling oil prices are an enormous stimulus to the global economy".

For Singapore, the oil decline is still expected to be an overall positive for the economy. CIMB Research economist Song Seng Wun said "the drop in oil prices is beneficial for the broader economy as Singapore is a net oil importer".

Singaporeans can look forward to lower petrol pump prices - as the commonly used 95-octane grade fell below $2 per litre - and businesses and households could soon enjoy lower electricity tariffs.

However, benefits for the economy will be balanced by margin pressures at the petroleum refineries, for example. Some cost pressures such as on labour are also unlikely to ease. Mr Song noted: "We are still seeing Singapore's restructuring story unfold, with foreign worker supply still tightly controlled."

For regional economies such as Malaysia, the impact may be more of a mixed one. Net oil exporter Malaysia is tipped to be hardest hit in the region, with a trade deficit expected, said UOB economist Francis Tan. With Malaysia's state oil company Petronas contributing about 31 per cent to public coffers last year, the outlook for the economy took a hit as investors sold the ringgit down to a historic low of 2.67 to the Singdollar last Friday.

The Singapore stock market ended last week flat but investors will be jittery heading into this week and keeping an eye on the Japanese elections today as well as the US Federal Reserve's rate-setting Federal Open Market Committee meeting starting on Tuesday.

Further selling off of oil and gas counters is expected at the start of the week, said remisier Alvin Yong.

"There's bound to be a prolonged period of weakness for these counters. Going forward, what will be key for the companies will be their ability to score further contracts in the face of plunging oil prices, and their ability to maintain a reasonable amount of net profit margins."

sushyan@sph.com.sg

Additional reporting by Rennie Whang

This article was first published on Dec 14, 2014.
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