Strategy
Strategy: Brace For Higher Energy And Crude Oil Prices
Analyst
Analyst
Highlights
- The situation in the Middle East has become precarious with potential disruptions to maritime traffic through both the Strait of Hormuz and the Bab el-Mandeb Strait. A further rise in crude oil prices is inevitable.
- We cut our 12-month STI target by 9.3% from 6,682 to 6,061 based on an equity risk premium of 3.4% for 2027, which is 0.25SD below the long-term mean, and risk-free rate at 2.5%. The target represents a fair 2026F PE of 18.3x and muted upside of 6% for the STI.
- We position defensively due to near-term headwinds from a prolonged conflict in the Middle East. Our investment themes: a) value creation through asset recycling and monetisation: Keppel (Target: S$13.26), Singtel (Target: S$5.50) and CityDev (Target: S$11.50); b) growth from Singapore as an aviation hub: SATS (Target: S$5.00); c) S-REITs with yields significantly above government bonds: NTT DC REIT (Target: US$1.29) and UI Boustead REIT (Target: S$1.16); d) value-oriented technology picks: Venture Corp (Target: S$21.10) and Valuetronics (Target: S$1.88); and e) SMID Gems: Riverstone (Target: S$1.21) and Pan United (Target: S$1.88).
What’s New
- We had cautioned about the looming threat from a prolonged gulf crisis in our recent Strategy report dated 25 Aug 26. We previously opined that the US could get bogged down as it becomes increasingly difficult to extricate itself from the conflict in the Middle East.
- The Middle East conflict has just escalated over the weekend, with the following developments:
- The Houthi rebels have seized Mokha, Dhubab, Perim and the Hanish islands. This has strengthened their ability to threaten shipping through the Bab el-Mandeb Strait, which is a critical chokepoint for maritime traffic traversing through Suez Canal and the Red Sea. These gains could expose tankers to greater risk of attack, raise freight and insurance costs, and disrupt deliveries to Asian customers, particularly as restrictions at Hormuz have increased Saudi dependence on its Red Sea export route. Houthi advances near Bab el-Mandeb add further risks to Saudi’s onward shipments from the Red Sea. The potential disruption could constrain Saudi Arabia’s export volume, delay deliveries and put upward pressure on global crude oil prices.
- The drone attack on Saudi Arabia’s 1,200km East-West pipeline has prompted a shutdown announced on 11 Sep 26, with Saudi authorities stating that the drones originated in Iraq. The pipeline has capacity to carry 7m bbl of crude oil per day from the main oilfields in eastern Saudi Arabia to the Port of Yanbu on the Red Sea, providing a crucial alternative route to export through the Strait of Hormuz. Its closure threatens to deprive Saudi Arabia of its only remaining option. The country’s ability to resume export depends on the extent of damage and the duration of repair time, but there is risk of repeated attacks on the East-West pipeline.
Highlights
- The situation in the Middle East has become precarious with potential disruptions to maritime traffic through both the Strait of Hormuz and the Bab el-Mandeb Strait. A further rise in crude oil prices is inevitable.
- We cut our 12-month STI target by 9.3% from 6,682 to 6,061 based on an equity risk premium of 3.4% for 2027, which is 0.25SD below the long-term mean, and risk-free rate at 2.5%. The target represents a fair 2026F PE of 18.3x and muted upside of 6% for the STI.
- We position defensively due to near-term headwinds from a prolonged conflict in the Middle East. Our investment themes: a) value creation through asset recycling and monetisation: Keppel (Target: S$13.26), Singtel (Target: S$5.50) and CityDev (Target: S$11.50); b) growth from Singapore as an aviation hub: SATS (Target: S$5.00); c) S-REITs with yields significantly above government bonds: NTT DC REIT (Target: US$1.29) and UI Boustead REIT (Target: S$1.16); d) value-oriented technology picks: Venture Corp (Target: S$21.10) and Valuetronics (Target: S$1.88); and e) SMID Gems: Riverstone (Target: S$1.21) and Pan United (Target: S$1.88).
What’s New
- We had cautioned about the looming threat from a prolonged gulf crisis in our recent Strategy report dated 25 Aug 26. We previously opined that the US could get bogged down as it becomes increasingly difficult to extricate itself from the conflict in the Middle East.
- The Middle East conflict has just escalated over the weekend, with the following developments:
- The Houthi rebels have seized Mokha, Dhubab, Perim and the Hanish islands. This has strengthened their ability to threaten shipping through the Bab el-Mandeb Strait, which is a critical chokepoint for maritime traffic traversing through Suez Canal and the Red Sea. These gains could expose tankers to greater risk of attack, raise freight and insurance costs, and disrupt deliveries to Asian customers, particularly as restrictions at Hormuz have increased Saudi dependence on its Red Sea export route. Houthi advances near Bab el-Mandeb add further risks to Saudi’s onward shipments from the Red Sea. The potential disruption could constrain Saudi Arabia’s export volume, delay deliveries and put upward pressure on global crude oil prices.
- The drone attack on Saudi Arabia’s 1,200km East-West pipeline has prompted a shutdown announced on 11 Sep 26, with Saudi authorities stating that the drones originated in Iraq. The pipeline has capacity to carry 7m bbl of crude oil per day from the main oilfields in eastern Saudi Arabia to the Port of Yanbu on the Red Sea, providing a crucial alternative route to export through the Strait of Hormuz. Its closure threatens to deprive Saudi Arabia of its only remaining option. The country’s ability to resume export depends on the extent of damage and the duration of repair time, but there is risk of repeated attacks on the East-West pipeline.
Analyst
Analyst
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