Volatile oil a drag on govt coffers

THE first three months of the year have been the best quarter for oil traders in recent years. Vitol, which is the largest independent energy trader in the world with 350 partners spread across the globe, made a clean profit of US$600mil (RM2.48bil) in the first quarter from the trading of oil.However, repeating the feat would be difficult.

Even the most seasoned of oil traders feel that oil would be volatile in the next few months and predicting the direction of the market is rather complicated.

The top trader in London-based Merchant Commodity Fund, Doug King, has described the oil market as greatly uncertain because traders are grappling with the dynamic forces of supply and demand.

The comments from King, who made a fortune by correctly predicting that oil was falling off the cliff from its US$100 per barrel in 2014, come amidst a roller-coaster ride for oil in the last one year.

In October last year, Brent crude hit a high of US$86 before coming down to a low of US$50 on Dec 24. The year started well with oil rising gradually to US$74 in the last week of April before coming down to US$60 last week.

In the last few days, Brent crude has inched up slowly to US$62 per barrel. The technicals on Brent crude point to at least two major resistance levels before it stays comfortably above the US$70-per-barrel mark.

The wild swings are not good for Malaysia, as the budget for this year is based on US$70 per barrel. We are six months into the year and according to data from Bloomberg, the average price of Brent crude is US$66 per barrel.

Can oil average the year at US$70 per barrel? Would we be able to achieve our growth target of 4.9% without breaching the federal government budget deficit of 3.4% for 2019?

The answer points to one person – US President Donald Trump. As the US president continues to press ahead with his “US First” policy ahead of the election next year, it would appear that oil prices will continue to be subdued.

The days of Saudi Arabia-led Opec controlling the price of oil is over. The US now calls the shots on how low or high it wants oil prices to be.

Saudi Arabia has the advantage of having the largest reserves of oil with the lowest cost of production. However, Saudi Arabia, together with allies from non-Opec countries such as Russia, is unable to control the supply-demand dynamics of oil.

The US, thanks to shale oil and gas, is a net exporter of energy. On top of that, it controls the supply and demand side of oil through other measures such as the trade war and sanctions on Iran.

The trade war with China has put a dent on global growth, which, in turn, has caused a global slowdown.

The International Monetary Fund (IMF) has predicted global economic growth to slow down to 3.3% this year from 3.6% last year before rising again to 3.6% in 2020.

Slower global economic growth is not good for oil, as demand is subdued.

Three years ago, China played an important role in determining the price of oil. It was a large consumer of the fuel and continues to be so, importing in excess of 10 million barrels of oil equivalent per day.

However, since 2015, China has been battling to restructure its domestic economy, which has excess capacity in most areas from manufacturing to property and buildings due to easy supply of money there. The bad loans, especially from the many peer-to-peer lending platforms, have further crippled the financial system.

But China’s resolve to put its house in order showed results when it recorded a 6.4% economic growth in the first quarter of this year, exceeding expectations marginally. China is expected to chalk up a growth of 6.5% this year.

But the prediction for the second-largest economy in the world has dampened after Trump escalated the trade war against it. In May, talks between the US and China broke down, resulting in the former slapping a 25% tariff on US$250bil worth of China’s exports.

On the supply side, there are constraints.

Venezuela, which is blessed with an abundance of oil, cannot get the commodity off the ground because of the political turmoil in that country. The US has also imposed sanctions on the existing administration of Venezuela.

The US has also imposed sanctions on Iran, the country with the second-largest oil reserves in the Middle East after Saudi Arabia, due to issues with regards to nuclear weapons.

In theory, when there are constraints in the supply of oil, it should help boost oil prices. However, it is not having any impact on oil prices, which leaves predicting oil prices a rather difficult task.

Late last year when Budget 2019 was delivered, many would not have doubted that the oil price would average US$70 per barrel. Now, nobody dares to predict with certainty that oil would average US$70 for the year.

Malaysia’s trade numbers are improving, beating the consensus, while the ringgit has improved against a weakened US dollar. Finance Minister Lim Guan Eng is confident that the economy will grow 4.9% this year without the federal government having to spend more than the predicted 3.4% deficit.

The optimists say that the government has a few aces up its sleeve to come up with the shortfall in revenue should Brent crude average less than US$70 per barrel. Among them is the expected increase in the income tax collection.

However, if oil prices continue to be volatile, which is likely to be the case, the task ahead for the government would be even harder.

The Alternative View