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Wednesday, 7 December 2016

Major news last week, what it means for Singapore stocks: #ICYMI

07:00 Posted by szcszc No comments
Last week, oil rallied to its highest level in the year at $54 a barrel. This was mainly due to the OPEC's agreement to cut its output by almost 1.2 million barrels. The oil price rally was also due to the expectation where the market did not expect an agreement to be reached, as well as the more-than-expected production cut.

Though an agreement has been met, there has been much skepticism as to whether the members will hold to the production levels as there are numerous times where its members have violated the group's decisions for self-interest. This is a classical example of games theory. Just a short summary, if members of a group expect others to cheat on the rules set due to huge self benefits, then it would be more wise to first violate the rules and have a more prominent hand although this course of action will definitely guarantee lower profits compared to the group's collective decision. The picture below shows an example referencing Saudi Arabia in their perspective of games theory.

Image result for opec games theory

Based on current context, it is more probable that the members will stick to the group decision as the previous record low oil prices have hurt the profits of the members. Being accustomed to the higher prices, it may seem that the members are not prepared to take a hit on government profits for too long, even though the initial intention was to flush out the frackers from US using low prices. Hence, the recent decision may provide a higher motivation to bolster their coffers before implementing the next action to grapple the increase in alternative supplies from frackers.

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Singapore has a number of oil and offshore companies and they are deeply hurt by the low oil prices which lasted longer than they believed. This is evident from the recent Swissco case. The recent rally could provide light in the tunnel, though there are uncertainties as to how long it will last. Companies that are better managed will also stand to benefit the most. However, even with the recent "co-operation" from OPEC, it might still be too soon to conclude that it will be the end of the oil slump. As stated above, once each members may deem that their self-interest outweighs the group collective interest and they might violate the agreement.

Possible counters that are SembCorp and Keppel Corp where they are the global heads in offshore and marine industry, mainly dealing in oil rigs. While oil exploration companies are also likely to benefit from the affilation to oil prices, these pose high risks pertaining to whether they can find oil in the first place.

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Source: http://www2.owen.vanderbilt.edu/lukefroeb/2003/mgt722/topics/game/game.html

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