Fixing of floor price for oil bodes well for Malaysia

UOB Kay Hian Research analyst Kong Ho Meng said while there have not been any large tenders awarded by Petroliam Nasional Bhd (Petronas), it expected contracts to be rolled out from next year. In Malaysia, he said, about 11% or about 35 of the over 300 platforms have been operating for over 40 years, and more than 200 wells have already been identified to be plugged and abandoned.

PETALING JAYA: Amid an uncertain oil and gas (O&G) environment, it would seem that a floor price for crude oil has been fixed at US$60 per barrel since the collective agreement by global oil producers to cut supply.

This development bodes well for Malaysia, both the government and local O&G industry players, as it signifies some clarity ahead.

While the crude oil price assumption of US$70 per barrel used for the tabling of Malaysia’s Budget 2019 may be high, it is still well within the US$60 to US$70 per barrel range. Tumbling crude oil prices would create increasing challenges for the government to finance Budget 2019.

According to the recently published Petroliam Nasional Bhd (Petronas) Activity Outlook for 2019 to 2021, Petronas has raised its assumed oil price on a planning basis to between US$60 and US$70 per barrel for 2019.

Previously, Oanda Corp head of trading for Asia-Pacific Stephen Innes had said that lower oil prices would be a negative driver for the already-weakening ringgit.

Hence, a floor price of US$60 per barrel offers some stability for the financing of Budget 2019 and the nation’s fiscal concerns.

Additionally, local O&G players would be able to chart their course ahead better, using the floor price as a base for crude oil price estimates.

The Organisation of the Petroleum Exporting Countries (Opec) and non-Opec members met in Vienna last week, agreeing to cut output by 1.2 million barrels per day.

According to the International Energy Agency (IEA), the agreement aims to achieve relative stability and bring the market towards balance.

“So far, the Brent crude oil price seems to have found a floor, remaining close to US$60 per barrel much where it was when the ministers met.

“Cooperation between Russia and Saudi Arabia is now the basis of production management, with these two countries having a large capacity to swing output one way or the other.

“For them, prices falling further would place their budgets under great stress,” it said.

Crude oil prices have been volatile recently, with the Brent hitting US$86 per barrel in early October on concerns that the market could tighten, following the implementation of Iranian sanctions.

After 37 days, the Brent crude oil price fell back to US$58 per barrel, as producers more than met the challenge of replacing Iranian and other barrels.

“Such volatility is not in the interest of producers or consumers,” said the IEA.

Floor price aside, the IEA also highlighted another concern – the United States’ growing influence.

For the first time since 1991, the US became a net exporter of crude and products in the week to Nov 30, 2018.

“The number, 211,000 barrels per day, is modest and even if it proves to be an isolated data point, the long-term trend is clear.

“As production grows inexorably, so will net imports decline and rising US exports will provide competition in many markets, including to some of the countries meeting in Vienna last week,” said the IEA.

On a year-to-date basis, US net imports have averaged 3.1 million barrels per day.

Slightly ahead of the shale revolution, US net imports amounted to 11.1 million barrels per day.

Going forward, the IEA expects demand for 2019 to grow by 1.4 million barrels per day to 100.6 million barrels per day, despite a considerable fall back in oil prices since the early October peak.

It said some of the support provided by lower prices would be offset by weaker economic growth globally, and certain emerging economies.

“Time will tell how effective the new production agreement will be in rebalancing the oil market.

“The next meeting of the Vienna Agreement countries takes place in April, and we hope that the intervening period is less volatile than has recently been the case,” said the IEA.