(Oct 2): Crude oil prices are trading near a 52- week high, after a steady climb in the past few weeks. The November contract for Brent crude hit a oneyear high of US$59.02 a barrel on Sept 25. It closed at US$57.90 on Sept 27. The equivalent contract for West Texas Intermediate crude traded at US$52.14 per barrel — 4.2% below the one-year high of the US$54.45 it hit on Feb 23.
The recent strength in crude oil prices was driven partly by threats of a supply cut from Iraq, the second-largest oil producer in the Organization of Petroleum Exporting Countries (Opec). On Sept 25, Turkish president Recep Tayyip Erdogan threatened to disrupt oil flow from the Kurdish region of Iraq in a show of disapproval over a Kurdish bid for independence. About 500,000 barrels of oil per day could be taken off the market if that happens.
Since last November, Opec has been attempting to lift crude oil prices by cutting production by 1.8 million barrels per day. In May, the oil cartel extended the production cut to March 31 next year.
However, production of US shale oil has continued to frustrate Opec’s efforts. Suzanne Minter, director of strategic industry analysis at S&P Global Platts, thinks US shale oil could continue to dampen crude oil prices. Given that much of the production costs of US producers have already been sunk in, they are able to supply the market at lower-than-expected prices, she explains. “So, even if we see a decline in prices, we may not see slowing US production in the market,” she says in a panel debate at the Asia Pacific Petroleum Conference 2017, held in Singapore from Sept 25 to 27.
Fellow panellist Mike Wittner, managing director and global head of oil research at Société Générale, thinks Opec may need to extend its production cut even further. “One way or another, whether it is done in one fell swoop or over a couple of meetings, they are going to have to extend the agreement at current levels through all of next year. [Still], all that gets you is a roughly balanced market,” he says. Opec is merely “holding the line”.
Euro weakens after German election results
In Germany, the election victory of the Christian Democrats (CDU) party may have provided some relief to party leader and incumbent chancellor Angela Merkel. But the outcome has sent the euro tumbling against the US dollar. The currency pair traded at 1.1745 on Sept 27, down 1.7% from 1.1951 on Sept 22.
“The weaker euro post-election was a result of Angela Merkel’s victory lap [being] bruised by a worse-than-expected result that leaves her facing tough coalition talks. Investors expressed concerns after the right-wing Alternative for Germany party received more than 13% of the vote,” Stephen Innes, head of trading at OANDA for Asia-Pacific, tells The Edge Singapore.
With 34.7% of the seats won, CDU is still the largest party in the German parliament. However, its share of seats has shrunk 9%. This means CDU will have to form a coalition to obtain a majority in parliament. The new coalition is likely to include the pro-business Free Democratic Party and the left-leaning Grüne (Green) party, after the Social Democrats party said it would not continue in a coalition with CDU.
Innes thinks the euro weakness is short-term as the market will return to focus on the monetary policy decisions of the European Central Bank and the US Federal Reserve. “If I were asked to shine my crystal ball on a one-year target... I would call the EURUSD 1.2400, as I believe the ECB policy normalisation, coupled with the non-stop political risks emanating from the Washington quagmire, makes a bullish dollar call more questionable,” he says.
Tightening measures hit Country Garden
Hong Kong-listed Country Garden Holdings was among several Chinese property developers that took a beating, after eight Chinese cities implemented further tightening measures on the property sector. This included curbs on reselling homes within two to three years of purchase. The stock was down 14.2% to HK$12.10 on Sept 25 from HK$14.10 on Sept 21. But it regained some lost territory to close at HK$12.28 on Sept 28.
Deutsche Bank says the share-price dip was also driven by profit-taking activity and a weakening industry sales growth outlook. That brought the China property sector to trade closer to its historical average of seven times earnings and 42% of net asset value. “We suggest investors buy quality names on [a] dip (China Vanke, KWG Property Holding, Future Land Development Holdings and CIFI Holdings Group), which trade at an undemanding valuation with strong earnings growth,” Deutsche analysts Stephen Cheung and Foo Leung write in a note dated Sept 26.
Mandarin Oriental plunges on hotel sale flop
Shares in Mandarin Oriental International fell substantially to close at $2.12 on Sept 28, after the potential sale of a hotel failed to materialise. In a Sept 27 statement, the hotel chain operator says none of the proposals it received for the sale of The Excelsior, Hong Kong “had met fully its expectations or transaction requirements”.
Mandarin Oriental had earlier announced that it was undertaking a review of its longterm strategic options in regard to the hotel. “As part of that review, the company had decided to test market interest in the possible sale of the property,” it said in a Sept 15 statement. The stock had run up 20.8% prior to the announcement, and subsequently rallied to as high as $2.81 on Sept 22.
On Sept 27, however, the stock plunged nearly 30% to close at $1.915. “As the proposals have not provided the basis for the sale of the property at the current time, the company is continuing to review all options, including those that may result in redevelopment of the property into a commercial building,” it says.
The Excelsior, Hong Kong is a four-star hotel wholly-owned by Mandarin Oriental. The 869-room hotel is located on Gloucester Road.
New Silkroutes declines after deal falls through
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Shares in New Silkroutes Group (NSG) declined 8.9% to 41 cents on Sept 28 from 45 cents on Sept 22, after the investment- holding company divested its entire 28.4% stake in New Silkroutes Asset Management on Sept 25. NSAM is a private-equity firm focusing on healthcare and infrastructure in Asia-Pacific, excluding Japan and Australia.
NSG sold its 2,841 shares to NSAM’s existing shareholder, director and CEO Ong Sea Eng for $805,000. NSAM has ceased to be an associated company of NSG. The company says the disposal is expected to have no material impact on its earnings per share and net tangible assets in the current financial year.
NSG had formed NSAM as a joint venture last October. At incorporation, NSG took a 30% stake. China’s Nanshan Group and Ong, a former United Overseas Bank executive, each took a 30% stake as well. The remaining 10% was taken by Fuji Capital.
Formerly known as Digiland International, NSG holds a mixed bag of assets. Its interests include oil trading, healthcare, real estate and IT and financial services. NSG’s non-executive chairman is Ho Sheng, a brother of Temasek Holdings CEO Ho Ching. Its group CEO is Goh Jin Hian, son of former prime minister Goh Chok Tong.
What to look out for
On Oct 1, ECB president Mario Draghi will present his speech on the outlook of the European economy. This will be followed by the ECB Monetary Policy Meeting Accounts on Oct 5, which will provide direction on the monetary policy decision in the European Union.
The Reserve Bank of Australia will announce its interest rate decision on Oct 3.
